A probabilistic model for the estimation of declining discount rate

In the Cost-Benefit Analysis (CBA) the traditional discount procedures determine a significant contraction of the financial terms that are furthest over time. This contraction is not acceptable in the economic evaluation of public projects with inter-generational effects, since it causes little appreciation of the net benefits for the future generations. The use of time-Declining Discount Rate (DDR) represents a possible solution to the problem. Following a critical analysis of the main methodologies that the theory describes, the study proposes an innovative model for the estimation of DDR. The model, based on principles widely recognized in literature, uses probabilistic laws and returns a simple-use forecasting algorithm, as uses economic and demographic data easy to find. The implementation for the Italian economy makes it possible to validate the model and makes it clear how significantly the results of the CBA can vary if a declining discount rate instead of a time-invariant rate is chosen. The important political repercussions on the entire allocation process of public resources demonstrate the effectiveness of hyperbolic discount procedures, suggesting to distinguish between constant discount rates for the evaluation of projects with intra-generational effects and time-declining discount rates for interventions with inter-generational implications.