The Social Cost of Capital: Recent Estimates for the EU Countries

Abstract

Discounting enables to express future monetary or socio-economic effects in terms of present values when inter-temporal decisions are to be taken. In the context of the cost-benefit analysis, this allows for directly comparing net benefits expressed in terms of their net present values, and, subsequently, for aggregating them to obtain a single measure of the project value (the net present value). This paper deals with the social discount rate used to discount economic flows and estimate the investment’s economic profitability indicators. It discusses the two most popular approaches for estimating the social discount rate, namely the social rate of return on private investment and the social rate of time preference, as well as the important implications on present and future generations deriving from using one discount rate instead of another. An overview of the social discount rates applied in several countries worldwide is provided and country-specific social discount rates for some EU Member States are empirically estimated using the social rate of time preference approach.

Keywords: Social discount rate, cost-benefit analysis, project evaluation

JEL Classification: D61, D63, D91, H43