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Gamma Discounting

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  • Martin L. Weitzman

Abstract

By incorporating the probability distribution directly into the analysis, this paper proposes a new theoretical approach to resolving the perennial dilemma of being uncertain about what discount rate to use in cost-benefit analysis. A numerical example is constructed from the results of a survey based on the opinions of 2,160 economists. The main finding is that even if every individual believes in a constant discount rate, the wide spread of opinion on what it should be makes the effective social discount rate decline significantly over time. Implications and ramifications of this proposed "gamma-discounting" approach are discussed.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.1.260
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 1 (March)
Pages: 260-271

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:1:p:260-271

Note: DOI: 10.1257/aer.91.1.260
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  1. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
  2. Cropper, Maureen & Laibson, David, 1998. "The implications of hyperbolic discounting for project evaluation," Policy Research Working Paper Series 1943, The World Bank.
  3. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
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  1. > Environmental and Natural Resource Economics > Climate economics > Discounting, equity, uncertainty
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