Discounting Caveats

Indications, Contraindications and Caveats

  1. Use IRR aware of shortcomings.
  2. Use payback periods aware of shortcomings.
  3. Understand "appropriate" discount rate
    • derives from opportunity cost
    • basic PPOL logic compares public expenditure to private and conceptualizes our choices as being about how to use society's resources
    • "appropriate" means weighted average of return from alternative uses of resources

Risky Outcomes

(S&Z 173) "The correct analytical approach is to separate the question of risk-free discount rate from the question of how we value risky outcomes."