Estimation of social discount rate for Lithuania

Vilma Kazlauskiene, Alina Stundziene

Abstract


Purpose of the article: The paper seeks to analyse the problematics of estimation of the social discount rate (SDR). The SDR is the critical parameter of cost-benefit analysis, which allows calculating the present value of cost and the benefit of public sector investment projects. Incorrect choice of the SDR can lead to the realisation of ineffective public project or conversely, cost-effective project will be rejected. The relevance of this problem analysis is determined by discussions and different viewpoints of scientists on the choice of the most appropriate approach to determine the SDR and absence of methodically based the SDR on the national level of Lithuania.
Methodology/methods: The research is performed by the scientific and methodical literature analysis, systematization, time series and regression analysis.
Scientific aim: The aim of the article is to calculate the SDR based on the statistical data of Lithuania.
Findings: The analysis of methods of SDR determination, as well as the researches performed by foreign researchers, allows stating that the social rate of time preference (SRTP) approach is the most appropriate. The SDR, calculated by the SRTP approach, reflects the main purpose of public investment projects, i.e. to enhance social benefit for society, the best. The analyses of SDR determination practice of the foreign countries shows that the SDR level should not be universal for all states. Each country should calculate the SDR based on its own data and apply it for the assessment of public projects.
Conclusions: The calculated SDR for Lithuania using the SRTP approach varies between 3.5% and 4.3%. Although it is lower than 5% that is offered by European Commission, this rate is based on the statistical data of Lithuania and should be used for the assessment of the national public projects. Application of the reasonable SDR let get the more accurate and reliable cost-benefit analysis of the public projects.

Keywords


public investment projects, social discount rate, cost-benefit analysis, social rate of time preference, Ramsey model

JEL Classification


D61; H43

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Online: 2016-10-04


DOI: http://dx.doi.org/10.13164/trends.2016.26.39