Revisiting Social Discount Rates for Public Investment

• Published in: KDI Journal of Economic Policy Vol. 39; no. 2; pp. 75 - 98
• Main Author: SONG, JOON HYUK
• Format: Journal Article
• Language: English
• Published: Korea Development Institute 01.05.2017
• Subjects: Opportunity Cost of Capital; Rate of Time Preference; Social Discount Rate
• ISSN: 2586-2995; 2586-4130
• DOI: 10.23895/KDIJEP.2017.39.2.75

This paper aims to estimate the social discount rate (SDR) rather than dig into its theoretical foundation. As SDRs can be derived by investigating both the rate of return on investment and the social time preference rate, we estimate the marginal productivity of both private and public capital and the time preference rate based on the Euler equation. In order to provide a single representative SDR, the weighted averages of the marginal productivity and time preference rate, whose weights are determined by the flow of funds data reflecting the social demand of funds, are presented. Based on the empirical results, we argue that the marginal productivity of private capital stands in the middle of the 3% range while that of public capital varies from 4.5% to 8.6%, with the time preference rate showing a decreasing trend from 3.2% in the early 2000s to 1.2% by around 2030. The single representative SDR or the weighted SDR is estimated to be approximately 3.0~4.5% and expected to continue its downward trend for the foreseeable future.