Resolving the discounting dilemma: Social time preference vs. social opportunity cost
DOI:
https://doi.org/10.14267/1588970X.2026.022Keywords:
Social discount rate, STP discounting, SOC discounting, Two-rate discounting, Shadow Price of Capital, Marginal Cost of Fund, D61, H43Abstract
Because discounting both imputes the capital costs of investment projects and intertemporally weighs their benefits, no project-independent discount rate can perform both functions to everyone’s satisfaction. Discount ing using the Social Time Preference Rate (STPR) results in undervalued capi tal 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 STPR is generally smaller than SOCR. This article proposes a two-rate discounting method that uses SOCR only to compute capital costs but not to dis count future benefits and uses STPR to discount future benefits but not to com pute capital costs. There is no need to choose between the STPR and the SOCR; both are needed to reach correct benefit-cost analysis 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) approaches.
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