Social discounting: social opportunity cost, social time preference and risk

Current government practice in setting social discount rates reflects two main divides. One, 50 years old, is whether the marginal cost of public funds should be built into the discount rate or handled separately. The other, more recent, is whether or not the implications for discounting of the covariance of public service benefits with income, or with equity markets, are substantial.

This paper discusses the latter, systematic risk issues. However, it mainly addresses enduring misunderstandings on both sides of the debate about ‘social opportunity cost’ versus ‘social time preference’ discounting.

An earlier version of this working paper (February 2017) was circulated under the title Social discounting: the SOC/STP divide and is available upon request.