Discounting, risk and inequality: A general approach

• We provide a general decomposition of the social discount rate.
• The decomposition highlights the role of risk and equity for many social criteria.
• We give an approximation of the social discount rate in the long run.
• In the long run, mainly extremal returns and the position of the worst-off matter.
• An OLG model highlights the limited role of market rates in the long run.

The common practice consists in using a unique value of the discount rate for all public investments. Endorsing a social welfare approach to discounting, we show how different public investments should be discounted depending on: the risk on the returns on investment, the systematic risk on aggregate consumption, the distribution of gains and losses, and inequality. We also study the limit value of the discount rate for very long term investments. We highlight the type of information that is needed about long-term scenarios in order to evaluate investments.