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CREED Paper #20: An Analysis of Private and Social Discount Rates in Costa Rica
|Author(s)||Bruce Aylward, Ina Porras|
|Serie(s)||Creed Working Papers|
The application of economic evaluation and valuation methodologies depends heavily on the intertemporal weighting of monetary flows. This is of particular importance in the case of environmental valuation where long-term environmental impacts are traded off against short-term productive benefits. A review of discount rates applied in the literature and by financing agencies in Costa Rica suggests that the methods and the rates employed have little grounding in theory or empirical analysis. In order to explore whether the ad hoc nature of discounting in Costa Rica is likely to be leading to error in economic analysis this paper reviews theoretical and methodological issues in discounting and then proceeds to a calculation of financial and social rates of discount. The results suggest that the best estimate of the private opportunity cost of capital, the consumption rate of interest (CRI) and the social discount rate are all in the 9-10% range. Given that the lack of a significant difference between the cost of capital and the CRI there is no immediate need to distinguish between the discounting of consumption and investment flows. The observed range of variation in the CRI suggests that discount rate sensitivity analysis should probably employ a range of from 7% to 10%. In other words, current practice may not be terribly inappropriate given this preliminary examination. Further effort should, however, be devoted to the estimation of key parameters involved in the models employed in the paper.
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