The Multi-Period Cost-Benefit Rule with Mobile Capital and Distorted Labor

Lind (1990) argues that capital mobility should be incorporated into the discussions of the social discount rate. He finds that when labor market distortion is ignored in that context, the appropriate discount rate for both project benefits and costs is the net rate of return, and the gross rate of return does not enter into the rule. Taking into account the labor market distortion, we find that a project’s impacts on government receipts should be incorporated into its evaluation and that costs should be multiplied by a marginal cost of funds (MCF) before being compared with benefits. Although the net rate continues to be the correct discount rate to use, the gross rate enters into the rule by having effects on the project’s receipt impacts and the MCF. Copyright Springer Science + Business Media, Inc. 2005