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This paper provides novel empirical evidence on the value of the elasticity of marginal utility, \\[ \\eta \\], for the United Kingdom. \\[ \\eta \\] is a crucial component of the social discount rate (SDR), which determines the inter-temporal trade-offs that are acceptable to society. Using contemporaneous and historical data, new estimates are obtained using four revealed-preference techniques: the equal-sacrifice income tax approach, the Euler-equation approach, the Frisch additive-preferences approach and risk aversion in insurance markets. A meta-analysis indicates parameter homogeneity across approaches, and a central estimate of 1.5 for \\[ \\eta \\]. The confidence interval excludes unity, the value used in official guidance by the UK government. The term structure of the SDR is then estimated. The result is a short-run SDR of 4.5% declining to 4.2% in the very long-run. This is higher and flatter than the UK official guidance. The difference stems from incorrect calibration of social welfare and estimation of the diffusion of growth. Other things equal, the results suggest that current UK guidance might need to be updated.

The most critical issue in evaluating policies and projects that affect generations of individuals is the choice of social discount rate. This paper shows that there exist social discount rates such that the planner can simultaneously be (i) an exponential discounting expected utility maximizer; (ii) intergenerationally Pareto—that is, if all individuals from all generations prefer one policy/project to another, the planner agrees; and (iii) strongly non-dictatorial—that is, no individual from any generation is ignored. Moreover, to satisfy (i)-(iii), if the time horizon is long enough, it is generically sufficient and necessary for social discounting to be more patient than the most patient individual's long-run discounting, independent of the social risk attitude.

In this paper I offer a fairly complete account of the idea of social discount rates as applied to public policy analysis. I show that those rates are neither ethical primitives nor observables as market rates of return on investment, but that they ought instead to be derived from economic forecasts and society's conception of distributive justice concerning the allocation of goods and services across personal identities, time, and events. However, I also show that if future uncertainties are large, the formulation of intergenerational well-being we economists have grown used to could lead to ethical paradoxes even if the uncertainties are thin-tailed. Various modelling avenues that offer a way out of the dilemma are discussed. None is entirely satisfactory.

Evaluating the benefits of investment projects related to climate change is complicated by disagreements surrounding the discount rate. It is widely known that greater discount-rate heterogeneity increases the weighted-average present value of investing if the weighted-average discount rate is held constant, which therefore reduces the minimum internal rate of return needed to justify now-or-never investment. A larger adjustment is appropriate for projects with longer lives. I extend this analysis in two directions, first by giving the decision-maker the option to delay investment. Greater discount-rate heterogeneity also increases the weighted-average present value of the option to wait and reevaluate investment in the future. This weakens the relationship between discount-rate heterogeneity and the optimal investment threshold—and in some cases actually reverses it. When discount rates are low and the project’s lifetime is short, increases in discount-rate heterogeneity can lead to tougher (not easier) optimal investment tests. The second extension examines the effect on these results of using different approaches to aggregate opinions about the discount rate, including the α-maxmin, minimax-regret, and multi-utilitarian criteria.

Estimates of the elasticity of the marginal utility of income are necessary for determining distributional weights to correct for diminishing marginal utility of income, which is particularly important in light of increasing concern about accounting for distributional impacts in regulatory review. The elasticity is also necessary for computing the social discount rate using the Ramsey formula. Despite many attempts to estimate the elasticity of the marginal utility of income, considerable uncertainty exists about the magnitude of this key parameter. In this paper, we use meta-analysis of estimates of the elasticity from the US and UK to shed light on the appropriate elasticity values to use for both distributional weighting and discounting. Relying on our findings, we tentatively conclude that it is reasonable to base the social discount rate and distributional weights on an elasticity of 1.6, with lower- and upper-bound sensitivity testing at 1.2 and 2.0. This estimate results in distributional weights which appear plausible, and which we believe can contribute to a consensus on how to conduct distributional weighting. Moreover, the resulting social discount rate is within the range typically recommended when the Ramsey formula is used.

The last few years have witnessed important advances in our understanding of time preference and social discounting. In particular, several rationales for the use of time-varying social discount rates have emerged. These rationales range from the ad hoc to the formal, with some founded solely in economic theory while others reflect principles of intergenerational equity. While these advances are to be applauded, the practitioner is left with a confusing array of rationales and the sense that almost any discount rate can be justified. This paper draws together these different strands and provides a critical review of past and present contributions to this literature. In addition to this we highlight some of the problems with employing DDRs in the decision-making process, the most pressing of which may be time inconsistency. We clarify their practical implications, and potential pitfalls, of the more credible rationales and argue that some approaches popular in environmental economics literature are ill-conceived. Finally, we illustrate the impact of different approaches by examining global warming and nuclear power investment. This includes an application and extension of Newell and Pizer [‘Discounting the benefits of climate change mitigation : how much do uncertain rates increase valuations?’ Journal of Environmental Economics and Management 46 (2003) 52] to UK interest rate data. Copyright Springer 2005

This paper proposes a social discount rate for transport infrastructure project evaluation in Germany that accounts for production efficiency, systematic traffic demand risk, as well as increasing uncertainty in the long-run. The systematic risk in infrastructure planning is measured by the sensitivity of transport volume towards GDP using cointegration analysis. In contrast to the only existing application of this model in transport economics, in this paper the systematic risk for freight transport projects is substantially higher than for passenger transport projects. Due to different systematic risk patterns, the discount rates for freight and passenger transport projects should differ as well, with the former being equal to approximately 3.5% and declining to 2.7% after 50 years, and the latter ranging between 2.0% and the risk-free rate of 1.3%. This paper focuses especially on the econometric challenges of the CAPM-like estimation of systematic risk in public transport infrastructure project assessment and is at the same time the first application to German data.

This short note argues that cost-benefit analysis (CBA), a tool employed by professional economists to evaluate the welfare consequences of public policies, embodies a variety of failures to heed the warnings of famous classical liberal economists. CBA attributes characteristics of individuals to society, fails to adequately account for the \"unseen\" consequences of policy, wipes out the future with a social discount rate as if \"in the long run we are all dead,\" and is an example of how the pursuit of mathematical logic can lead to failures of common sense. As a result of these problems, CBA offers a useful teaching device for students, demonstrating how even modern-day economists at the top of their profession continue to make basic errors pointed out by economists generations ago. CBA in this context is best thought of as a failure to learn from the past.

Social discounting conventions vary widely. Some differences reflect institutional constraints, but many reflect differing assumptions about how a social discount rate should be derived and applied. The divide between advocates of social opportunity cost and social time preference (STP) frameworks seems unbridgeable. There is no consensus among STP advocates on whether the social cost of funding $1 of public spending is barely more than $1 of consumption or perhaps more than $2; or on whether the covariance of public service benefits with income merits a discount rate premium that is trivial or a few percentage points. The practicalities of government fund raising are sometimes overlooked. The issues are here reviewed in the light of the literature and of experience with developing and applying social discounting regimes and extended debates within government.

This paper reviews seven contemporary official guidelines to cost-benefit analysis (CBA) with respect to eight major cost-benefit issues drawing on the latest edition of the major CBA textbook for guidance, although not complete authority. The guidelines are those by UK Treasury, European Commission, U.S. Environmental Protection Agency, New Zealand Treasury, Infrastructure Australia, NSW State Treasury, and Victorian State Department of Treasury and Finance. The eight major issues discussed are the issue of standing, core valuation principles, the scope of CBA with reference to potential additional economic benefits, changes in real values over time, the marginal excess tax burden, the social discount rate, use of benefit-cost ratios, and treatment of risk. While all the guidelines are quality guides to CBA, the paper finds that there is room for improved discussion and practice at various points in each of these guidelines.