Abstract
The Social Discount Rate (SDR) is among the most critical parameters of the Cost-Benefit Analysis (CBA), because it strongly conditions the results. In the case of economic evaluations, that is when the analyses are conducted from the point of view of the community, the SDR allows to make financially comparable the costs and the benefits that the investment generates over time. Thus, it influences both the “weighting” of the cash flows temporal distribution and the measure of inter-generational equity associated with the project. Extremely important issues for those interventions that display their effects on a very long time horizon. In these circumstances, the traditional discount procedures show limits because they end up excessively reducing the financial terms that occur over a certain period. A possible solution to this problem is the use of hyperbolic discount procedures through declining discount rate (DDR).
In the present paper we intend to first outline in essential terms the theoretical framework of the approaches proposed in the literature for the estimation of the DDR. It is about the Consumption-Based Approach to DDRs and the Expected Net Present Value (ENPV). In the second part of the study a critical examination of the same approaches is proposed, in order to highlight their limitations and prominent theoretical aspects. These elements are useful to outline research perspectives for the characterization of an innovative model for estimating the declining discount rate, which can reduce at the same time the theoretical problems and the operational difficulties of the estimation methods currently used.
The contribution to this paper is the result of the joint work of both authors, to which the paper has to be attributed in equal parts.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Similar content being viewed by others
References
Dolores, L., Macchiaroli, M., De Mare, G.: Sponsorship for the sustainability of historical-architectural heritage: application of a model’s original test finalized to maximize the profitability of private investors. Sustainability 9(10), 1750 (2017)
Bencardino, M., Nesticò, A.: Demographic changes and real estate values. A quantitative model for analyzing the urban-rural linkages. Sustainability 9(4), 536 (2017)
Morano, P., Locurcio, M., Tajani, F., Guarini, M.R.: Fuzzy logic and coherence control in multi-criteria evaluation of urban redevelopment projects. Int. J. Bus. Intell. Data Min. 10(1), 73–93 (2015)
Napoli, G., Giuffrida, S., Trovato, M.R., Valenti, A.: Cap rate as the interpretative variable of the urban real estate capital asset: a comparison of different sub-market definitions in Palermo, Italy. Buildings 7(3), 1–25 (2017)
Nesticò, A., Sica, F.: The sustainability of urban renewal projects: a model for economic multi-criteria analysis. J. Prop. Invest. Financ. 35(4), 397–409 (2017)
Navrud, S., Ready, R.C.: Valuing Cultural Heritage: Applying Environmental Valuation Techniques to Historic Buildings, Monuments and Artifacts, 1st edn. Edward Elgar Publishing Ltd., Cheltenham (2002)
Tweed, C., Sutherland, M.: Built cultural heritage and sustainable development. Landsc. Urban Plann. 83(1), 62–69 (2007)
Munda, G.: Social Multi-criteria Evaluation for a Sustainable Economy, 1st edn. Springer, Heidelberg (2008). https://doi.org/10.1007/978-3-540-73703-2
Ferretti, V., Bottero, M., Mondini, G.: Decision making and cultural heritage: an application of the multi-attribute value theory for the reuse of historical buildings. J. Cult. Herit. 15(6), 644–655 (2014)
Calabrò, F.: Local communities and management of cultural heritage of the inner areas. An application of break-even analysis. In: Gervasi, O., Murgante, B., Misra, S., Borruso, G., Torre, C.M., Rocha, A.M.A.C., Taniar, D., Apduhan, B.O., Stankova, E., Cuzzocrea, A. (eds.) ICCSA 2017. LNCS, vol. 10406, pp. 516–531. Springer, Cham (2017). https://doi.org/10.1007/978-3-319-62398-6_37
Della Spina, L.: Integrated evaluation and multi-methodological approaches for the enhancement of the cultural landscape. In: Gervasi, O., Murgante, B., Misra, S., Borruso, G., Torre, C.M., Rocha, A.M.A.C., Taniar, D., Apduhan, B.O., Stankova, E., Cuzzocrea, A. (eds.) ICCSA 2017. LNCS, vol. 10404, pp. 478–493. Springer, Cham (2017). https://doi.org/10.1007/978-3-319-62392-4_35
Newell, R.G., Pizer, W.A.: Discounting the distant future: how much do uncertain rates increase valuations? J. Environ. Econ. Manag. 46(1), 52–71 (2003)
Arrow, K.J., Maureen, L., Cropper, C.G., Groom B., Heal, G.M., Newell, R.G., Nordhaus, W.D.: How should benefits and costs be discounted in an intergenerational context? The views of an expert panel. Resources for the future discussion paper, pp. 12–53 (2013)
Weitzman, M.: On the environmental discount rate. J. Environ. Econ. Manag. 26(2), 200–209 (1994)
Weitzman, M.: Why the far-distant future should be discounted at its lowest possible rate. J. Environ. Econ. Manag. 36(3), 201–208 (1998)
Weitzman, M.: Gamma discounting. Am. Econ. Rev. 91(1), 261–271 (2001)
Henderson, N., Langford, I.: Cross-disciplinary evidence for hyperbolic social discount rates. Manag. Sci. 44(11), 1493–1500 (1998)
Cropper, M.L., Laibson D.: The Implications of Hyperbolic Discounting for Project Evaluation. World Bank Policy Research Working Paper Series 1943, Washington, D.C. (1998)
Read, D.: Is time-discounting hyperbolic or subadditive? J. Risk Uncertain. 23(1), 5–32 (2001)
Rubinstein, A.: Economics and psychology? The case of hyperbolic discounting. Int. Econ. Rev. 44(4), 1207–1216 (2003)
Harris, C., Laibson, D.: Dynamic choices of hyperbolic consumer. Econometrica 69(4), 935–957 (2001)
Gollier, C.: Discounting an uncertain future. J. Public Econ. 85, 149–166 (2002)
Hepburn, C., Koundouri, P., Pasnopoulou, E., Pantelidis, T.: Social discounting under uncertainty: a cross-country comparison. J. Environ. Econ. Manag. 57, 140–150 (2009)
Gustman, A., Steinmer, T.: Policy effects in hyperbolic vs exponential models of consumption and retirement. J. Public Econ. 96, 465–473 (2012)
Freeman, M., Groom, B., Panopoulou, E., Pantelidis, T.: Declining discount rates and the Fisher Effect: inflated past, discounted future? J. Environ. Econ. Manag. 76, 32–39 (2015)
Lesser, J., Zerbe, R.: What can economic analysis contribute to the sustainability debate? Contemp. Econ. Policy 13(3), 88–100 (1995)
Schelling, T.: Intergenerational discounting. Energy Policy 23(4–5), 395–401 (1995)
Groom, B., Hebpurn, C., Koundouri, P., Pearce, D.: Declining discount rates: the long and the short of it. Environ. Resour. Econ. 32, 445–493 (2005)
Heal, G.: Valuing the Future: Economic Theory and Sustainability. Columbia University Press, New York (1998)
Treasury, H.M.: The Green Book: Appraisal and Evaluation in Central Government. TSO, London (2003)
Rapport Lebègue: Révision du taux d’actualisation des investissements publics. Commissariat Général au Plan, Paris (2005)
Dasgupta, P.: Discounting climate change. J. Risk Uncertain. 37(2), 141–169 (2008)
Goulder, L.H., Williams, R.: The choice of discount rate for climate change policy evaluation. Clim. Change Econ. 3(4), 1–18 (2012)
De Mare, G., Nesticò, A., Tajani, F.: The rational quantification of social housing. In: Murgante, B., Gervasi, O., Misra, S., Nedjah, N., Rocha, A.M.A.C., Taniar, D., Apduhan, B.O. (eds.) ICCSA 2012. LNCS, vol. 7334, pp. 27–43. Springer, Heidelberg (2012). https://doi.org/10.1007/978-3-642-31075-1_3
Zhuang, J., Liang, Z., Lin, T., De Guzman, F.: Theory and practice in the choice of social discount rate for cost-benefit analysis: a survey. ERD, Working Paper No. 94, Asia Development Bank (2007)
Gollier, C.: Pricing the Future: The Economics of Discounting and Sustainable Development. Princeton University Press, Princeton (2011)
Gollier, C.: Discounting with fat-tailed economic growth. J. Risk Uncertain. 37, 171–186 (2008)
Cropper, M.L., Freeman, M.C., Groom, B., Pizer, W.A.: Declining discount rates. Am. Econ. Rev. 104(5), 538–543 (2014)
Groom, B., Koundouri, P., Panopoulou, E., Pantelidis, T.: Discounting the distant future: how much does model selection affect the certainty equivalent rate? J. Appl. Econom. 22, 641–656 (2007)
Nesticò, A., De Mare, G., Conte, A.: Approcci teorici ed empirici nella stima del saggio sociale di sconto, Valori e valutazioni 14 (2015)
Florio, M., Sirtori, E.: The social cost of capital: recent estimates for the EU. Working Paper No. 3, Centre for Industrial Studies, Milano (2013)
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 Springer International Publishing AG, part of Springer Nature
About this paper
Cite this paper
Nesticò, A., Maselli, G. (2019). Intergenerational Discounting in the Economic Evaluation of Projects. In: Calabrò, F., Della Spina, L., Bevilacqua, C. (eds) New Metropolitan Perspectives. ISHT 2018. Smart Innovation, Systems and Technologies, vol 101. Springer, Cham. https://doi.org/10.1007/978-3-319-92102-0_28
Download citation
DOI: https://doi.org/10.1007/978-3-319-92102-0_28
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-92101-3
Online ISBN: 978-3-319-92102-0
eBook Packages: Intelligent Technologies and RoboticsIntelligent Technologies and Robotics (R0)