Intergenerational Discounting in the Economic Evaluation of Projects

The Social Discount Rate (SDR) is among the most critical parameters of the Cost-Benefit Analysis (CBA), because it strongly conditions the results. In the case of economic evaluations, that is when the analyses are conducted from the point of view of the community, the SDR allows to make financially comparable the costs and the benefits that the investment generates over time. Thus, it influences both the “weighting” of the cash flows temporal distribution and the measure of inter-generational equity associated with the project. Extremely important issues for those interventions that display their effects on a very long time horizon. In these circumstances, the traditional discount procedures show limits because they end up excessively reducing the financial terms that occur over a certain period. A possible solution to this problem is the use of hyperbolic discount procedures through declining discount rate (DDR). In the present paper we intend to first outline in essential terms the theoretical framework of the approaches proposed in the literature for the estimation of the DDR. It is about the Consumption-Based Approach to DDRs and the Expected Net Present Value (ENPV). In the second part of the study a critical examination of the same approaches is proposed, in order to highlight their limitations and prominent theoretical aspects. These elements are useful to outline research perspectives for the characterization of an innovative model for estimating the declining discount rate, which can reduce at the same time the theoretical problems and the operational difficulties of the estimation methods currently used.