Discounting theory and its application in the public sector
Bonna, Ralph Anthony
Nickerson, Robert G.
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The purpose of this paper is to review the current policy established by the Office of Management and Budget (OMB) concerning the use of discounting in evaluating time-distributed costs and benefits of proposed public investments. Although a widely accepted concept in the private sector, the use of discounting in the public sector has been less clearly defined and a subject of considerable debate. The mechanics of discounting and the importance of the discount rate in investment decisions are discussed. A brief history of discounting in the public sector is presented including highlights of the Congressional Hearings in 1968 from which the current policy resulted. Several issues relating to the OMB policy such as the question of social versus economic goals, the effect of budget constraints, and the potential misapplication or misuse of the discounting methodology are addressed. Particular attention is given to the problem of inflation and its impact on the established rate.
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