Theoretical and empirical approaches to estimating the social discount rate. An estimation for Italy through the Ramsey Formula

The choice of an appropriate social discount rate (SDR) is a controversial issue, although the social rate of time preference (SRTP) is nowadays the preferred method. Since 2001 Italian guidelines recommend a SDR of 5%, but this proposal is not based upon solid arguments. The purpose of the study is to provide a quantitative measure of the SRTP for the economic evaluation of projects in Italy. Starting from the review of the international literature on approaches in analysing the social discount rate, the quantitative measure of the SRTP is carried out through the empirical calibration of Ramsey formula. The analysis of the Italian income tax structure shows that the elasticity of marginal utility falls between 1,109 and 1,291. Historical data on economic growth indicate that the expected growth rate of per capita consumption is 1,62%. The rate of time preference, estimated at 1,271%, is mainly based on the mortality rate. It is suggested that Italy should adopt a SDR that varies between 3,1% and 3,4%. In terms of practical implications, evaluators and decision makers may obtain more reliable results on the profitability of investment projects. The authors use a model to analyze the different factors that determine the value of the social discount rate, rarely estimated in Italy with a quantitative approach.