Practical Values for the Social Discount Rate

A major reason the quality of cost-benefit analysis (CBA) varies widely is incon-sistent use of the social discount rate (SDR). This article offers guidance about the choice of the SDR. Namely, we recommend the following procedures: If the proj-ect is intragenerational (does not have effects beyond 50 years) and there is no crowding out of private investment, then discount all flows at 3.5 percent; if the project is intragenerational and there is some crowding out of investment, then weight investment flows by the shadow price of capital of 1.1 and then discount at 3.5 percent; if the project is intergenerational and there is no crowding out of investment, then use a time-declining scale of discount rates; if the project is intergenerational and investment is crowded out, then convert investment flows during the first 50 years to consumption equivalents using a shadow price of 1.1, and then discount all of these flows at 3.5 percent, and discount all flows after the 50th year using time-declining rates. We then compare current discounting prac-tices of U.S. federal agencies with our estimates. Consistent use of the recom-mended rates would eliminate arbitrary choices of discount rates and would lead to better public sector decision-making. © 2004 by the Association for Public Pol-icy Analysis and Management