The social discount rate: some implications of the budget-constrained opportunity cost approach
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Authors
Ng, Kok Chuan
Subjects
Social discount rate
Opportunity cost rate of return
Nonlinear programming
GAMS
Opportunity cost rate of return
Nonlinear programming
GAMS
Advisors
Boger, Dan C.
Terasawa, Katsuaki L.
Date of Issue
1991-03
Date
March 1991
Publisher
Monterey, California. Naval Postgraduate School
Language
en_US
Abstract
The social discount rate is an important issue in the cost-benefit analysis for selecting public projects. However, there has been no general consensus as to the appropriate value of the social rate of discount for public investment. In 1987, Quirk and Terasawa proposed using the opportunity cost rate of return as an alternative approach to the choosing of the social discount rate in a fixed-budget scenario. Essentially, the appropriate value of the government rate of discount is the highest rate of return available from the portfolio of the unfunded government projects. In this study, the characteristics of the discount rates is explored in the context of choosing an efficient portfolio of government projects under a fixed budget condition. The costs and benefits of the projects are treated as variables and are to be endogenously determined by optimizing the overall discounted benefits. It is assumed that the costs and benefits of projects are known and continuous functions of force size, unit system maintenance and operational support. A mathematical model is used to represent the relationship between the benefit and cost of various projects. The Karesh-Kuhn-Tucker (KKT) convexity conditions are assumed for these so-called diminishing-return projects. In addition, two-year constant-returns-to-scale projects with fixed rates of return are introduced as reference projects such that their rates of return can be used directly as the discount rates under the concept of the opportunity cost rate of return. The discounted present values (DPV) of the net benefits of both the optimal and the non-optimal portfolios are found to be in agreement with those expected under the concept of the opportunity cost rate of return.
Type
Thesis
Description
Series/Report No
Department
Department of Operations Research
Organization
Naval Postgraduate School (U.S.)
Identifiers
NPS Report Number
Sponsors
Funder
Format
54 p.
Citation
Distribution Statement
Approved for public release; distribution is unlimited.
Rights
Copyright is reserved by the copyright owner