Estimating Social Discount Rate Trend in Iran

Authors

1 Economic Research Institute, Tarbiat Modares University, Tehran, Iran

2 Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran

Abstract

The Discount rate is one of the important variables in the inter-temporal analysis which makes it possible to compare the current and the future values and enables economic agents and policymakers to make better decisions. In this context, the discount rate is a vital variable for the accurate evaluation of economic projects. Considering the different approaches that governmental and private sectors use to implement the investment projects, for evaluation of the governmental and public projects, a separate discount rate is used called social discount rate (SDR). In this article by using the structural equation modeling, we have estimated the SDR trend in the Iranian economy during the period 1996- 2016. To do that by extracting influencing & consequence factors of SDR (as a latent variable), we applied a Multiple Indicators and Multiple Causes (MIMIC) model. The SDR trend, as the main finding of this paper, seems to be robust enough due to its explanatory power for fluctuations of the Iranian economy in reality. The results imply that the SDR has had a mild decreasing trend in Iran's economy during the sample period and among influencing variables, the inflation rate has had the most impact on its trend. Accordingly, when the level of prices rocketed during the periods 2012-14, the SDR trend experienced a more than 60% increasing jump. However, the GDP has been the variable that mostly affected by the SDR fluctuations. It seems that controlling inflation and consequently social inflationary expectation can be proposed as a proper policy recommendation to manage SDR and its distorting impacts in Iran.
 

Keywords


Abdoli, Gh. (2009). Estimate of Social Discount Rate for Iran. Economics Research, 10, 3(34), 135-156.
Abelson, P., & Dalton, T. (2018). Choosing the Social Discount Rate for Australia. Australian Economic Review51(1), 52-67.
Akbulut, H., & Seçilmiş, E. (2018). Estimation of a Social Discount Rate for Turkey. Socio-Economic Planning Sciences, 67, 78-85.
Armitage, S. (2017). Discount Rates for Long-Term Projects: the Cost of Capital and Social Discount Rate Compared. The European Journal of Finance23(1), 60-79.
Arrow, K. J., & Lind, R. C. (1978). Uncertainty and the Evaluation of Public Investment Decisions. Retrieved from https://user.iiasa.ac.at/~hochrain/KIT%202017%20Material/Thema%201%20Arrow%20Lind%20Theorem%20(Section%202).pdf
Bardhan, P. K. (1995). Research on Poverty and Development Twenty Years after Redistribution with Growth. OPS Document Reproduction Series, 64, Retrieved from World Bank.
Becker, G. S., & Mulligan, C. B. (1997). The Endogenous Determination of Time Preference. The Quarterly Journal of Economics,112(3), 729-758.
Boardman, A. E., Moore, M. A., & Vining, A. R. (2008). Social Discount Rates for Canada. In John Deutsch Institute Conference: Discount Rates for the Evaluation of Public-Private Partnerships. Retrieved from http://jdi-legacy.econ.queensu.ca/Files/Conferences/PPPpapers/Moore%20conference%20paper.pdf
Boardman, A. E., Moore, M. A., & Vining, A. R. (2010). The Social Discount Rate for Canada Based on Future Growth in Consumption. Canadian Public Policy36(3), 325-343.
Bohm-Bawerk, E. (1890). Capital and Interest. History of Economic Thought Books, Retrieved from https://socialsciences.mcmaster.ca/econ/ugcm/3ll3/bawerk/Capital/index.html
Burgess, D. F., & Zerbe, R. O. (2011). Appropriate Discounting for Benefit-Cost Analysis. Journal of Benefit-Cost Analysis, 2(2), 1-20.
Cardenas, J. C., & Carpenter, J. (2008). Behavioral Development Economics: Lessons from Field Labs in the Developing World. The Journal of Development Studies44(3), 311-338.
Central Bank of the Islamic Republic of Iran. (2015). Economic Report and Balance Sheet 2013 Year, 19, Price Trends. Retrieved from https://www.cbi.ir
---------- (2009). Economic Report and Balance Sheet 2007 Year, 19, Price Trends. Retrieved from https://www.cbi.ir
Dalali Isfahani, R., Bakhshi Dastjerdi, R., & Hosseini, J. (2009). Theoretical and Experimental Examination of the Temporal Preference Rate Case Study. International Economics Studies (Research Bulletin of Isfahan University), 1(34), 69-78.
Daneshmand, A., Jahangard, E., & Abdollah-Milani, M. (2018). A Time Preference Measure of the Social Discount Rate for Iran. Journal of Economic Structures, 7(29), 1-10.
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74(366a), 427-431.
Edwards, S. (1986). Country Risk, Foreign Borrowing, and the Social Discount Rate in an Open Developing Economy. Journal of International Money and Finance5, S79-S96.
Florio, M., & Sirtori, E. (2013). The Social Cost of Capital: Recent Estimates for the EU Countries. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2723379
Frederick, S., Loewenstein, G., & O'donoghue, T. (2002). Time Discounting and Time Preference: A Critical Review. Journal of Economic Literature, 40(2), 351-401.
Frey, B. S., & Weck-Hanneman, H. (1984). The Hidden Economy as an ‘Unobserved’ Variable. European Economic Review26(1-2), 33-53.
Fuchs, V. R. (1982). Introduction to “Economic Aspects of Health” (1-12). In Economic Aspects of Health. Chicago: University of Chicago Press.
Gaudet, G. (2007). Natural Rconomique. Canadian Journal of Economics, 40(4), 1033-1059.
Giles, D. E. (1999). Modelling the Hidden Economy and the Tax-Gap in New Zealand. Empirical Economics24(4), 621-640.
Goldberger, A. S. (1972). Structural Equation Methods in the Social Sciences. Econometrica, 40(6), 979-1001.
Halicioglu, F., & Karatas, C. (2013). A Social discount Rate for Turkey. Quality & Quantity, 47(2), 1085-1091.
Hausman, J. A. (1979). Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables. The Bell Journal of Economics, 10(1), 33-54.
Hotelling, H. (1931). The Economics of Exhaustible Resources. Journal of Political Economy39(2), 137-175.
Kula, E. (2004). Estimation of a Social Rate of Interest for India.Journal of Agricultural Economics, 55(1), 91-99.
Lawrance, E. C. (1991). Poverty and the Rate of Time Preference: Evidence from Panel Data. Journal of Political Economy, 99(1), 54-77.
Lopez, H. (2008). The Social Discount Rate: Estimates for Nine Latin American Countries. The World Bank, Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1149572
Lumley, S. (1997). The Environment and the Ethics of Discounting: an Empirical Analysis. Ecological Economics, 20(1), 71-82.
Markandya, A., & Pearce, D. W. (1988). Environmental Considerations and the Choice of the Discount Rate in Developing Countries. World Bank Policy Planning and Research Staff, Environment Department, Retrieved from The World Bank.
Moore, M. A., Boardman, A. E., & Vining, A. R. (2013). More Appropriate Discounting: The Rate of Social Time Preference and the Value of the Social Discount Rate. Journal of Benefit-Cost Analysis,4(1), 1-16.
Moore, M. A., Boardman, A. E., Vining, A. R., Weimer, D. L., & Greenberg, D. H. (2004). Just give me a number! Practical Values for the Social Discount Rate. Journal of Policy Analysis and Management23(4), 789-812.
Moseley, W. G. (2001). African Evidence on the Relation of Poverty, Time Preference and the Environment. Ecological Economics38(3), 317-326.
Mozayani, A. H. (2017). Economic Appraisal of Projects (Advance Topics). SAMT: Institute for Research and Development in Humanities.
Policy, U. (2008). Guide to Cost-Benefit Analysis of Investment Projects. Retrieved from https://archiwum.miir.gov.pl/media/5195/cba_guide.pdf
Rae, J. (1834). The Sociology Theory of Capital. California: CreateSpace.
Ramsey, F. P. (1928). A Mathematical Theory of Saving. The Economic Journal38(152), 543-559.
Samuelson, P. A. (1937). A Note on Measurement of Utility. The Review of Economic Studies, 4(2), 155-161.
Shirdel, R., Sadeghi, H., Assari Arani, H., Abdoli, Gh. (2017). Estimating the Social Discount Rate of Iran with the Social Time of Preference. Quarterly Journal of Fiscal and Economic Policies, 5(18), 7-24.
Solow, R. M. (1974). Intergenerational Equity and Exhaustible Resources. The Review of pdf Economic Studies, 41, 29-45.
Spiro, P. (2010). The Social Discount Rate for Provincial Government Investment Projects. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2259707_code2045770.pdf?abstractid=2259707&mirid=1
Tanaka, T., Camerer, C. F., & Nguyen, Q. (2010). Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam. American Economic Review, 100(1), 557-571.
Urminsky, O., & Zauberman, G. (2015). The Psychology of Intertemporal Preferences. The Wiley Blackwell Handbook of Judgment and Decision Making, 2, 141-181.
Viscusi, W. K., & Moore, M. J. (1989). Rates of Time Preference and Valuations of the Duration of life. Journal of Public Economics38(3), 297-317.
Weitzman, M. L. (2001). Gamma Discounting. American Economic Review, 91(1), 260-271.
Zhuang, J., Liang, Z., Lin, T., & De Guzman, F. (2007). Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: a Survey (94). ERD Working Paper\Series, Retrieved from https://www.econstor.eu/bitstream/10419/109296/1/ewp-