MIT Golub Center for Finance and Policy
Public Policy
What is the Social Discount Rate? MIT Economists Weigh In
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Governments regularly make investment and regulatory decisions whose consequences will extend for years, decades, or even centuries into the future. Is it worthwhile to widen a highway? Should additional drinking water contaminants be regulated? What is the cost to society of a ton of carbon emissions? Such decisions can hinge critically on the discount rate used by policy analysts to translate estimates of future costs and benefits into present values.
In the U.S., the highly consequential rules for benefit cost analysis and discount rate selection by federal agencies are laid out in two innocuously named directives known as OMB Circular A-4 and OMB Circular A-94. For the first time in twenty years, the U.S. Office of Management and Budget is proposing major changes to those rules and solicited public comment on the proposals.
A group of MIT professors, many affiliated with the Golub Center for Finance and Policy, drafted two comment letters offering their suggestions on how to improve the Circulars. An important part of their message is that there isn’t a single social discount rate. Rather, the principles of financial economics can be applied to public choice, and those principles imply that the correct discount rate should reflect the cost of the associated risk, which will vary considerably across projects and policies.
Additional Links:
- Proposed Circular A-4
- Proposed Circular A-94
- A recent article by Professor Deborah Lucas, Director of the GCFP, suggesting why the best guide to the social discount rate is fair value accounting principles can be found here.
Comment Authors
- Prof. Paul Joskow
- Prof. Christopher Knittel
- Prof. Deborah Lucas
- Prof. Gilbert Metcalf
- Prof. John Parsons
- Prof. Robert Pindyck
- Prof. Richard Schmalensee
Additional signatories to comments:
Comments on Draft Revisions to OMB Circulars A-4 and A-94
