The social discount rate

Andrew Caplin, John Leahy

    Research output: Contribution to journalArticlepeer-review

    Abstract

    What discount rate should be applied to social investments? It is standard to use the market interest rate, thereby respecting private preferences. We show that application of this "revealed preference" criterion rests on faith, not on logic. It is justified only if preferences over all choices, including past choices, are time invariant. The conditions for this to be true are stringent. Under more reasonable conditions, policy makers should be more patient than private citizens, whose choices define the most short-sighted Pareto optimum.

    Original languageEnglish (US)
    Pages (from-to)1257-1268
    Number of pages12
    JournalJournal of Political Economy
    Volume112
    Issue number6
    DOIs
    StatePublished - Dec 2004

    ASJC Scopus subject areas

    • Economics and Econometrics

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