Evaluation of Public Projects from the Viewpoint of Social Rate of Discount

A social rate of discount is an important variable for cost-benefit analysis. Its size can be crucial for an approval (or disapproval) of the project under evaluation, therefore it is important to have a theoretically founded estimate of the discount rate. There are two main approaches to estimating the social rate of discount. The first one is a so called social time preference rate (STPR), which is composed of three components: pure time preference, mortality rate and a component reflecting secular growth of per capita consumption and wealth. We agree with other authors that although pure time preference is not in reality zero for individuals due to myopia and irrationality, it should be equal to zero from the point of view of the public sector. We have also shown why it is inconsistent to use mortality rate directly as a component of the STPR and why a somewhat lower rate should be used instead. These two components together with an estimate of gradually decreasing growth of per capita consumption give a gradually decreasing STPR for the Czech Republic starting at 5.4 % and converging in 40 years' period to 2.8 % per year. The other approach to estimating the social discount rate is based on social opportunity costs (SOC). We used long-term bond yields for estimating a certainty equivalent social discount rate. We found gradually decreasing discount rate as appropriate, which starts at 3.2 % and declines by 0.016 percentage points per every year of duration of the project.

Keywords: cost-benefit analysis, social rate of discount, intergenerational solidarity, pure time preference, certainty equivalence, long-term bonds