1 / 12

Social Discount Rate

Social Discount Rate. Consumers (Savers): Marginal Rate of Time Preference (MRTP) Producers (Investors): Marginal Rate of Return on Investment (MRRI) Under appropriate assumptions: Social Discount Rate (SDR) = MRTP = MRRI Equals “market” interest rate. Consumers-Savers. X 1. x 1. x 0.

lala
Download Presentation

Social Discount Rate

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Social Discount Rate • Consumers (Savers): Marginal Rate of Time Preference (MRTP) • Producers (Investors): Marginal Rate of Return on Investment (MRRI) • Under appropriate assumptions: • Social Discount Rate (SDR) = MRTP = MRRI • Equals “market” interest rate

  2. Consumers-Savers X1 x1 x0 I1 I0 X0

  3. Producers-Investors X1 x1 x0 X0

  4. X1 X0

  5. Social Discount Rate But in reality not a single interest rate for all savers and investors • Factors affecting interest rates: • Transactions costs • Differences in risks • Different time horizons • Taxes • Direct interventions in credit markets

  6. Transactions Costs

  7. Transactions Costs of Financial Intermediation Si r Ss ri’ ri rs’ rs Di K ∆I ∆S ∆K

  8. Blended Rate • Capital for project is combination of additional savings and reduced investment in private sector (crowding out) • ∆K = ∆S - ∆I • SDR = (∆S/∆K)*rs + (∆I/∆K)*ri • Harberger: Empirical studies show savings rates insensitive to interest rates (S/ r  0), so ∆S  0 • SDR  ri

  9. Ss = SI r ri’ ri rs Di Ds K ∆I = ∆K ∆S = 0

  10. “Small” Investments • In the previous examples, we have examined the effects of “large” investments • The amount of capital needed for the new investment is enough to affect market interest rates • But many investments are not so big, will not affect interest rates • For these scale of investments, the supply of savings may be considered to be perfectly elastic

  11. r ri Si rs Ss Di ∆S = ∆K K ∆I = 0

  12. “Small” Investments • ∆K = ∆S - ∆I • SDR = (∆S/∆K)*rs + (∆I/∆K)*ri • But now ∆I = 0 • SDR = rs • So, for “Small” investments, the social opportunity cost of capital should be consumers marginal rate of time preference (MRTP), which is < MRRI

More Related