Durham, NC 27708
Institutional Affiliation: Duke University
NBER Working Papers and Publications
|December 2018||The Discount Rate for Public Policy over the Distant Future|
with William A. Pizer: w25413
The choice of discount rate has a significant impact on net benefit estimates when costs today have benefits over long time horizons. Standard U.S. government practice for cost–benefit analysis is to bound such analysis using two alternative rates. These rates are meant to represent the rate of return paid by capital investment and the rate received by consumers. Previous work has shown this approach legitimately bounds the analysis—but only when future benefits accrue directly to consumers either in a two-period model or as a perpetuity. We generalize to consider arbitrary patterns of future benefits, accruing either directly to consumers or indirectly through future investment. We derive an expression for the appropriate discount rate and show that it converges to the consumption rate fo...