Sub-optimal saving and the shadow price of labor The public good argument

Abstract

One argument for the incorporation of a 'premium on saving' into calculations of the shadow price of labor has been the claim that aggregate inter-generational savings are a public good and the individual savings decisions lead to sub-optimal provision of savings. This paper shows that even if this claim was true, the incorporation of a 'premium on savings' into benefit-cost analysis calculations would be inappropriate. The shadow price of labor relative to project output shoud still be set at the relative effects on aggregate income of hiring a worker on the one hand and producing output on the other. Show more