An assessment of discount methods for evaluating efficiency of investments in education

As clearly stated by Pareto, no society can avoid the economic problem of "opposition between tastes and obstacles" that is, as in other categories of economic decisions, investments in education have to take into account their opportunity cost. This implies that when education policies need to be implemented, there is a previous need of comparing different actions and evaluating them to assess their attractiveness. In this comparison process, one of the technical difficulties which has to be solved is the choice of the correct mathematical aggregation rule (i.e. the commonly called investment evaluation criterion or discount method) to use. The internal rate of return (IRR) is widely used in educational policy and planning; the main justifications are three: 1) the choice of a discount rate may vary for different countries and at different times, while IRR is an "objective" measure, 2) IRR allows the comparison with investments in the private sector, and 3) IRR allows the comparison of investments in different educational fields, such as primary schooling and university (by simply considering the average rates of return in each field). However, the debate on the proper evaluation criterion to use, when a private investment decision has to be taken or a public project appraisal has to be carried out, is a traditional one in financial, public and production economics. Although the considerable amount of existing literature, the problem of the choice of the right investment evaluation criterion is still an open one. The majority of authors claim that net present value (NPV) is a superior criterion and thus it is the one to be always used. Other authors try to show that various investment evaluation criteria, under specific conditions, arrive at the same recommendation. This research aims at clarifying this controversial topic by focusing on some clear cut formal properties of the various investment evaluation criteria and by considering the empirical characteristics of the different fields of application. Clear guidelines for education investment evaluation will be drawn.