Discount rates and shadow prices for public investment

This paper extends the Harberger–Sandmo–Drèze model for public discount rates to a many-good economy. It derives a formula for discount rates which are specific to each public enterprise or agency and used by them to discount future outputs and inputs evaluated at market prices. Such an approach is shown to be more efficient than that of simply using a single rate for all public projects. It is also more practical than asking each public firm to use second-best shadow prices in their analyses of investment projects.The general results are first provided; then, simple cases are considered and numerical examples presented to help interpret our formula and analyse its main determinants.