Introduction to the ARFE Theme on the Social Discount Rate

Abstract

Governments allocate a large share of real and financial capital globally, and their choices of discount rates for project and policy evaluation have a first-order effect on social welfare. The importance of adopting a principles-based approach to selecting discount rates has new urgency in light of the very long horizons over which the benefits and costs of policies to address climate change are being evaluated. The four articles in this theme provide an interpretive overview of the literature on many of the theoretical, practical, legal, and philosophical considerations for discount rate selection by governments. This introduction summarizes the main points of each article and highlights some of the common threads that emerge. These include the importance of using risk-adjusted rates, the problems that arise when discount rates are chosen to be artificially low, and the large disconnect between common government practices and the principles of financial economics.