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On Discount Rates for Cost-Benefit Analysis

  • Arnold C. Harberger

Abstract

This paper is concerned with the choice of the appropriate rate of discount for use in cost-benefit analysis and project appraisal. In particular, attention is focused on the manner in which the appropriate discount rate depends upon the conditions prevailing in the labor market of the economy in question. Where labor is genuinely in excess supply, to the point where all workers to be employed in the operation of a project can be assumed to be drawn from a large pool of unemployed, the wages to be paid to labor should not be counted as an economic cost, and should therefore not be deducted from the gross benefit stemming from the investment in the project. The consequence of this procedure is to produce high estimated returns to investment, and consequently a high discount rate for cost-benefit work. For India in particular, the assumption of a superabundant labor supply, in the sense just mentioned, would appear to require that a discount rate of over 30 percent be used in cost-benefit analysis.

Keywords

Discount Rate Cash Flow Marginal Productivity Project Evaluation Social Rate 
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Notes

  1. 1.
    These procedures are discussed in detail in Arnold C. Harberger, ‘Investment in Man vs. Investment in Machines: The Case of India’, in C. A. Anderson and M. J. Bowman, eds., Education and Economic Development (Chicago: Aldine Press, 1965).Google Scholar
  2. 3.
    See Government of India, The Cabinet Secretariat, The National Sample Survey, No. 33: Wages, Employment, Income and Indebtedness of Agricultural Labor Households in Rural Areas, Delhi, 1960, pp. 18, 23, 61.Google Scholar
  3. 4.
    See Government of India, The Cabinet Secretariat, The National Sample Survey, No. 46: Consumer Expenditure of Agricultural Labor Households in Rural Areas, Delhi, 1961, pp. 31, 37.Google Scholar
  4. 5.
    See T. W. Schultz, Transforming Traditional Agriculture, New Haven, Conn.: Yale University Press, 1964, pp. 53–70.Google Scholar
  5. 6.
    K. N. Raj, Economic Aspects of the Bhakra Nangal Project, Bombay: Asia Publishing House, 1960, pp. 77–78.Google Scholar
  6. 9.
    Government of India, Ministry of Information and Broadcasting, India, 1961, Delhi: 1961, p. 377.Google Scholar

Copyright information

© Arnold C. Harberger 1972

Authors and Affiliations

  • Arnold C. Harberger
    • 1
  1. 1.University of ChicagoUSA

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