Skip to main content
SpringerLink
Log in

Intergenerational Discounting in the Economic Evaluation of Projects

  • Conference paper
  • First Online:
New Metropolitan Perspectives (ISHT 2018)

Part of the book series: Smart Innovation, Systems and Technologies ((SIST,volume 101))

Included in the following conference series:

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.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 169.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 219.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 219.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  1. 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)

    Article  Google Scholar 

  2. Bencardino, M., Nesticò, A.: Demographic changes and real estate values. A quantitative model for analyzing the urban-rural linkages. Sustainability 9(4), 536 (2017)

    Article  Google Scholar 

  3. 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)

    Article  Google Scholar 

  4. 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)

    Google Scholar 

  5. 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)

    Article  Google Scholar 

  6. 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)

    Book  Google Scholar 

  7. Tweed, C., Sutherland, M.: Built cultural heritage and sustainable development. Landsc. Urban Plann. 83(1), 62–69 (2007)

    Article  Google Scholar 

  8. 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

    Book  Google Scholar 

  9. 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)

    Article  Google Scholar 

  10. 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

    Chapter  Google Scholar 

  11. 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

    Chapter  Google Scholar 

  12. 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)

    Article  MATH  Google Scholar 

  13. 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)

    Google Scholar 

  14. Weitzman, M.: On the environmental discount rate. J. Environ. Econ. Manag. 26(2), 200–209 (1994)

    Article  MATH  Google Scholar 

  15. Weitzman, M.: Why the far-distant future should be discounted at its lowest possible rate. J. Environ. Econ. Manag. 36(3), 201–208 (1998)

    Article  MathSciNet  MATH  Google Scholar 

  16. Weitzman, M.: Gamma discounting. Am. Econ. Rev. 91(1), 261–271 (2001)

    Article  Google Scholar 

  17. Henderson, N., Langford, I.: Cross-disciplinary evidence for hyperbolic social discount rates. Manag. Sci. 44(11), 1493–1500 (1998)

    Article  MATH  Google Scholar 

  18. 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)

    Google Scholar 

  19. Read, D.: Is time-discounting hyperbolic or subadditive? J. Risk Uncertain. 23(1), 5–32 (2001)

    Article  MathSciNet  MATH  Google Scholar 

  20. Rubinstein, A.: Economics and psychology? The case of hyperbolic discounting. Int. Econ. Rev. 44(4), 1207–1216 (2003)

    Article  Google Scholar 

  21. Harris, C., Laibson, D.: Dynamic choices of hyperbolic consumer. Econometrica 69(4), 935–957 (2001)

    Article  MathSciNet  MATH  Google Scholar 

  22. Gollier, C.: Discounting an uncertain future. J. Public Econ. 85, 149–166 (2002)

    Article  Google Scholar 

  23. Hepburn, C., Koundouri, P., Pasnopoulou, E., Pantelidis, T.: Social discounting under uncertainty: a cross-country comparison. J. Environ. Econ. Manag. 57, 140–150 (2009)

    Article  Google Scholar 

  24. Gustman, A., Steinmer, T.: Policy effects in hyperbolic vs exponential models of consumption and retirement. J. Public Econ. 96, 465–473 (2012)

    Article  Google Scholar 

  25. 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)

    Article  Google Scholar 

  26. Lesser, J., Zerbe, R.: What can economic analysis contribute to the sustainability debate? Contemp. Econ. Policy 13(3), 88–100 (1995)

    Article  Google Scholar 

  27. Schelling, T.: Intergenerational discounting. Energy Policy 23(4–5), 395–401 (1995)

    Article  Google Scholar 

  28. 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)

    Article  Google Scholar 

  29. Heal, G.: Valuing the Future: Economic Theory and Sustainability. Columbia University Press, New York (1998)

    Google Scholar 

  30. Treasury, H.M.: The Green Book: Appraisal and Evaluation in Central Government. TSO, London (2003)

    Google Scholar 

  31. Rapport Lebègue: Révision du taux d’actualisation des investissements publics. Commissariat Général au Plan, Paris (2005)

    Google Scholar 

  32. Dasgupta, P.: Discounting climate change. J. Risk Uncertain. 37(2), 141–169 (2008)

    Article  MATH  Google Scholar 

  33. Goulder, L.H., Williams, R.: The choice of discount rate for climate change policy evaluation. Clim. Change Econ. 3(4), 1–18 (2012)

    Article  Google Scholar 

  34. 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

    Chapter  Google Scholar 

  35. 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)

    Google Scholar 

  36. Gollier, C.: Pricing the Future: The Economics of Discounting and Sustainable Development. Princeton University Press, Princeton (2011)

    Google Scholar 

  37. Gollier, C.: Discounting with fat-tailed economic growth. J. Risk Uncertain. 37, 171–186 (2008)

    Article  MATH  Google Scholar 

  38. Cropper, M.L., Freeman, M.C., Groom, B., Pizer, W.A.: Declining discount rates. Am. Econ. Rev. 104(5), 538–543 (2014)

    Article  Google Scholar 

  39. 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)

    Article  MathSciNet  Google Scholar 

  40. Nesticò, A., De Mare, G., Conte, A.: Approcci teorici ed empirici nella stima del saggio sociale di sconto, Valori e valutazioni 14 (2015)

    Google Scholar 

  41. Florio, M., Sirtori, E.: The social cost of capital: recent estimates for the EU. Working Paper No. 3, Centre for Industrial Studies, Milano (2013)

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Salerno, 84084, Fisciano, Italy

    Antonio Nesticò & Gabriella Maselli

Authors
  1. Antonio Nesticò
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Gabriella Maselli
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Antonio Nesticò .

Editor information

Editors and Affiliations

  1. Mediterranea University of Reggio Calabria, Reggio Calabria, Italy

    Francesco Calabrò

  2. Mediterranea University of Reggio Calabria, Reggio Calabria, Italy

    Lucia Della Spina

  3. University of Reggio Calabria, Reggio Calabria, Italy

    Carmelina Bevilacqua

Rights and permissions

Reprints and permissions

Copyright information

© 2019 Springer International Publishing AG, part of Springer Nature

About this paper

Check for updates. Verify currency and authenticity via CrossMark

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

Publish with us

Policies and ethics

Search

Navigation