Di Ciommo, Floridea and Hoz Sánchez, Daniel de la and Guzman, Luis Angel
Exploring users inter-temporal preferences for measuring transport social equity effects.
In: "XVIII Congreso Panamericano de Ingeniería de Tránsito, Transporte y Logística.PANAM 2014", 11/06/2014 – 13/06/2014, Santander, España. pp. 1-17.
There exist different ways for defining a welfare function. Traditionally, welfare economic theory foundation is based on the Net Present Value (NPV) calculation where the time
dependent preferences of considered agents are taken into account. However, the time preferences, remains a controversial subject. Currently, the traditional approach employs a unique discount rate for various agents. Nevertheless, this way of discounting appears inconsistent with sustainable development. New research work suggests that the discount rate may not be a homogeneous value. The discount rates may change following the individual’s preferences. A significant body of evidence suggests that people do not behave following a constant discount rate. In fact, UK Government has quickly recognized the power of the arguments for time-varying rates, as it has done in its official guidance to Ministries on the appraisal of investments and policies. Other authors deal with not just time preference but with uncertainty about future income (precautionary saving). In a situation in which economic growth rates are similar across time periods, the rationale for declining social optimal discount rates is driven by the preferences of the individuals in the economy, rather than expectations of growth. However, these approaches have been mainly focused on long-term policies where intergenerational risks may appear. The traditional cost-benefit analysis (CBA) uses a unique discount rate derived from market interest rates or investment rates of return for discounting the costs and benefits of all social agents included in the CBA. However, recent literature showed that a more adequate measure of social benefit is possible by using different discount rates including inter-temporal preferences rate of users, private investment discount rate and intertemporal preferences rate of government. Actually, the costs of opportunity may differ amongst individuals, firms, governments, or society in general, as do the returns on savings. In general, the firms or operators require an investment rate linked to the current return on savings, while the discount rate of consumers-users depends on their time preferences with respect of the current and the future consumption, as well as society can take into account the intergenerational well-being, adopting a lower discount rate for today’s generation. Time discount rate of social actors (users, operators, government and society) places a lower value in a future gain, but the uncertainty about future income strongly determines the individual preferences. These time and uncertainty depends on preferences and should be integrated into a transport policy formulation that may have significant social impacts. The discount rate of a user cannot be the same than the operator’s discount rate. The preferences of both are different. In addition, another school of thought suggests that people, such as a social group, may have different attitudes towards future costs and benefits. Particularly, the users have different discount rates related to their income. Some research work tried to modify user discount rates using a compensating weight which represents the inverse of household income level. The inter-temporal preferences are a proxy of the willingness to pay during the time. Its consideration is important in order to make acceptable or not a policy or investment