Resolving the Discounting Dilemma: Social Time Preference vs. Social Opportunity Cost

Because discounting both imputes capital costs
of investment projects and intertemporally weighs their benefits, no project-independent
discount rate can perform both functions to everyone’s satisfaction. Discounting by the Social
Time Preference Rate (STPR) results in undervalued capital costs, while discounting
with the Social Opportunity Cost Rate (SOCR) may undervalue future benefits – at least in the eyes of those making the opposite
choice, as generally STPR<SOCR. This article proposes a two-rate discounting method that uses the SOCR only to
compute capital costs but not to discount future benefits
and uses the STPR to discount future benefits but not to compute capital costs.
There is no need to choose between the STPR and the SOCR, both are needed to reach
correct BCA conclusions. If there is agreement on the value of the SOCR, there
will be agreement on which projects are feasible because, regardless of the
value of the STPR, the SOCR is the hurdle feasibility rate. Two-rate
discounting is a more accurate correction to single rate social time preference
(STP) discounting than the shadow price of capital (SPC) or the marginal cost
of funds (MCF) corrections.<br>