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Annual Review of Financial Economics

Volume 15, 2023

The Social Discount Rate: Legal and Philosophical Underpinnings

Abstract

Discounting of deferred impacts of government policies is a long-established practice that has been the target of substantial litigation and continued philosophical debate. Legal challenges to the social rate of discount have resulted in general acceptance of the principle of discounting at a nonzero rate for both monetary and nonmonetary impacts. Courts have displayed a general familiarity with discounting and often require transparent justification for the selection of the discount rate based on established scientific principles. The philosophical issues are more wide-ranging and include whether nonmonetary impacts should be discounted, the use of the opportunity cost of capital or the social rate of time preference, the time frame that is pertinent for setting the discount rate, and determination of whose preferences should have standing. Intergenerational issues are particularly challenging, raising questions regarding which generation's preferences should be recognized, the potential for dynamic inconsistencies arising from preferential discount rates, and intertemporal inequities. Benefit-cost analyses that include appropriate recognition of benefits and costs for future generations serve a constructive function in providing a mechanism for recognizing future effects on social welfare.

Keyword(s): benefit-cost analysis, discounting, intergenerational, intertemporal, JEL D61, JEL H43, JEL K32, JEL Q54, social rate of discount
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2023-11-01
2024-05-09
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  • Article Type: Review Article

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