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Discounting under uncertainty: Disentangling the Weitzman and the Gollier effect

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  • Traeger, Christian P.
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    Abstract

    The uncertainty of future economic development affects the term structure of discount rates and, thus, the intertemporal weights that are to be used in cost benefit analysis. The U.K. and France have recently adopted a falling term structure to incorporate uncertainty and the U.S. is considering a similar step. A series of publications discusses the following concern: a seemingly analogous argument used to justify falling discount rates can also justify increasing discount rates. We show that increasing and decreasing discount rates mean different things, can coexist, are created by different channels through which risk affects evaluation, and have the same qualitative effect of making long-term payoffs more attractive.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

    Volume (Year): 66 (2013)
    Issue (Month): 3 ()
    Pages: 573-582

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    Handle: RePEc:eee:jeeman:v:66:y:2013:i:3:p:573-582

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    Web page: http://www.elsevier.com/locate/inca/622870

    Related research

    Keywords: Benefit cost analysis; Discounting; Term structure; Uncertainty; Weitzman–Gollier puzzle;

    References

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    1. GOLLIER Christian, 2008. "Should we discount the far-distant future at its lowest possible rate?," LERNA Working Papers 08.30.274, LERNA, University of Toulouse.
    2. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    3. Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," IDEI Working Papers 588, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Hepburn, Cameron & Groom, Ben, 2007. "Gamma discounting and expected net future value," Journal of Environmental Economics and Management, Elsevier, vol. 53(1), pages 99-109, January.
    5. 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.
    6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    7. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, vol. 1(2), pages 85-89, June.
    8. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
    9. Gollier, Christian, 2010. "Expected net present value, expected net future value, and the Ramsey rule," Journal of Environmental Economics and Management, Elsevier, vol. 59(2), pages 142-148, March.
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    Cited by:
    1. Gollier, Christian, 2014. "Gamma discounters are short-termist," IDEI Working Papers 828, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Gollier, Christian, 2014. "Gamma discounters are short-termist," TSE Working Papers 14-499, Toulouse School of Economics (TSE).

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