Choosing the future: Markets, ethics, and rapprochement in social discounting
By: Millner, Antony and Heal, Geoffrey
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BookPublisher: Journal of Economic Literature Description: 61(3), Sep, 2023: p.1037-1087.Subject(s): Social discount rates (SDRs) Public cost-benefit analysis Market-based approach Intertemporal ethics Market imperfections Intertemporal welfare function Normative disagreements Aggregating theories of social welfare Social discounting
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Journal of Economic LiteratureSummary: This paper provides a critical review of the literature on choosing social discount rates (SDRs) for public cost-benefit analysis. We discuss two dominant approaches, the first based on market prices and the second based on intertemporal ethics. While both methods have attractive features, neither is immune to criticism. The market-based approach is not entirely persuasive even if markets are perfect, and faces further headwinds once the implications of market imperfections are recognised. By contrast, the 'ethical' approach—which relates SDRs to marginal rates of substitution implicit in a single planner's intertemporal welfare function—does not rely exclusively on markets, but raises difficult questions about what that welfare function should be. There is considerable disagreement on this matter, which translates into enormous variation in the evaluation of long-run payoffs. We discuss the origins of these disagreements, and suggest that they are difficult to resolve unequivocally. This leads us to propose a third approach that recognises the immutable nature of some normative disagreements, and proposes methods for aggregating diverse theories of intertemporal social welfare. We illustrate the application of these methods to social discounting, and suggest that they may help us to move beyond long-standing debates that have bedevilled this field. It discusses two main approaches: one based on market prices and the other on intertemporal ethics. The market-based approach, though attractive, faces criticism, especially considering market imperfections. The ethical approach avoids market reliance but raises complex questions about the welfare function to use, leading to significant disagreement. The paper proposes a third approach to reconcile these normative disagreements by aggregating diverse theories of intertemporal social welfare. This method could help advance the debate on social discounting.- Reproduced
https://www.aeaweb.org/articles?id=10.1257/jel.20211675
This paper provides a critical review of the literature on choosing social discount rates (SDRs) for public cost-benefit analysis. We discuss two dominant approaches, the first based on market prices and the second based on intertemporal ethics. While both methods have attractive features, neither is immune to criticism. The market-based approach is not entirely persuasive even if markets are perfect, and faces further headwinds once the implications of market imperfections are recognised. By contrast, the 'ethical' approach—which relates SDRs to marginal rates of substitution implicit in a single planner's intertemporal welfare function—does not rely exclusively on markets, but raises difficult questions about what that welfare function should be. There is considerable disagreement on this matter, which translates into enormous variation in the evaluation of long-run payoffs. We discuss the origins of these disagreements, and suggest that they are difficult to resolve unequivocally. This leads us to propose a third approach that recognises the immutable nature of some normative disagreements, and proposes methods for aggregating diverse theories of intertemporal social welfare. We illustrate the application of these methods to social discounting, and suggest that they may help us to move beyond long-standing debates that have bedevilled this field. It discusses two main approaches: one based on market prices and the other on intertemporal ethics. The market-based approach, though attractive, faces criticism, especially considering market imperfections. The ethical approach avoids market reliance but raises complex questions about the welfare function to use, leading to significant disagreement. The paper proposes a third approach to reconcile these normative disagreements by aggregating diverse theories of intertemporal social welfare. This method could help advance the debate on social discounting.- Reproduced
https://www.aeaweb.org/articles?id=10.1257/jel.20211675
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