Christian Gollier, Frederick van der Ploeg, Jiakun Zheng

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This paper investigates economists' attitudes toward adjusting discount rates based on the risk profiles of public projects through a survey. The results show that a large majority of respondents agree that discount rates should be adjusted according to the specific risk profiles of the projects being evaluated. Projects with higher risks should have higher discount rates, while projects with lower risks should have lower discount rates. However, when comparing projects with significantly different risk profiles, the degree of adjustment in the discount rates recommended by experts is much smaller than the adjustments that financial markets have historically applied to private investments. This phenomenon is referred to as the "discount premium puzzle."

Moreover, among those in favor of using a single discount rate, there is disagreement about whether it should be based on the average cost of capital, sovereign borrowing costs, or the Ramsey rule. This disagreement leads to variations in the recommended level of the discount rate. In the case of climate change damage evaluation, economists tend to recommend a lower discount rate, which contradicts the common assumption in climate economics that climate damage is proportional to global economic activity. This suggests that, although there is theoretical support for adjusting discount rates for different projects, the practical application of such adjustments has not fully accounted for risk differences, especially in the case of climate change projects.

The survey also reveals an interesting observation: although modern asset pricing theory emphasizes the need for project-specific risk adjustments in discount rates, the surveyed economists are relatively conservative in applying these adjustments. They recommend a higher discount rate for railway projects than for healthcare projects, but the difference remains modest and does not fully incorporate risk premiums in the evaluation of climate change projects.

Finally, the study underscores that the current use of a single discount rate for public investment evaluations is problematic. The use of a single discount rate fails to adequately account for the risk characteristics of different projects, potentially leading to misallocation of resources. For example, projects like railway construction may increase macroeconomic risk, while healthcare facility expansions may hedge against such risks. Using a single discount rate could result in overestimating the net present value of risk-increasing projects, while undervaluing risk-reducing projects. The results suggest that governments should abandon the use of a uniform discount rate and instead adopt a risk-adjusted approach based on the specific risks of each project. This approach would more accurately assess the social benefits of public investments and prevent misallocation of resources.

In conclusion, the survey results indicate that while economists recognize the need to adjust discount rates for risk, there remains a relatively conservative attitude toward applying these adjustments in practice. Particularly in the case of climate change projects, economists have not fully accounted for the risk correlation with global economic activity, which may affect the effectiveness of climate policy. Therefore, reforming the current public investment evaluation system by adjusting discount rates based on project-specific risks is an important direction for future public decision-making.