FEDERAL DISCOUNT RATE POLICY, THE SHADOW PRICE OF CAPITAL, AND CHALLENGES FOR REFORMS

This paper addresses the problem of determining discount rate policies that are both consistent with basic economic principles and implementable given real-world constraints. The paper first examines the discounting policies of the three federal oversight and budget agencies as they apply to public investment, regulation, lease-purchase, and asset divestiture decisions. One prominent technique that has been suggested as a means of improving discounting policy, the shadow price of capital approach, is then considered in detail. Key aspects of its implementation are considered, including the determination of program cost incidence, rates of saving and reinvestment, and proper aggregation of capital costs. The analysis suggests that there are significant empirical challenges associated with this approach. © 1990.