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Declining Discount Rates: The Long and the Short of it

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Author Info

  • Ben Groom

    ()

  • Cameron Hepburn
  • Phoebe Koundouri
  • David Pearce

Abstract

The last few years have witnessed important advances in our understanding of time preference and social discounting. In particular, several rationales for the use of time-varying social discount rates have emerged. These rationales range from the ad hoc to the formal, with some founded solely in economic theory while others reflect principles of intergenerational equity. While these advances are to be applauded, the practitioner is left with a confusing array of rationales and the sense that almost any discount rate can be justified. This paper draws together these different strands and provides a critical review of past and present contributions to this literature. In addition to this we highlight some of the problems with employing DDRs in the decision-making process, the most pressing of which may be time inconsistency. We clarify their practical implications, and potential pitfalls, of the more credible rationales and argue that some approaches popular in environmental economics literature are ill-conceived. Finally, we illustrate the impact of different approaches by examining global warming and nuclear power investment. This includes an application and extension of Newell and Pizer [‘Discounting the benefits of climate change mitigation : how much do uncertain rates increase valuations?’ Journal of Environmental Economics and Management 46 (2003) 52] to UK interest rate data. Copyright Springer 2005

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File URL: http://hdl.handle.net/10.1007/s10640-005-4681-y
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 32 (2005)
Issue (Month): 4 (December)
Pages: 445-493

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Handle: RePEc:kap:enreec:v:32:y:2005:i:4:p:445-493

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: global warming; intergenerational equity; social cost benefit analysis; time inconsistency; uncertainty; time varying discount rates;

References

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  1. Cameron Hepburn, 2004. "Hyperbolic Discounting And Resource Collapse," Royal Economic Society Annual Conference 2004 103, Royal Economic Society.
  2. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
  3. Gollier, Christian & Zeckhauser, Richard, 2003. "Collective Investment Decision Making with Heterogeneous Time Preferences," IDEI Working Papers 198, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Cropper, Maureen & Laibson, David, 1998. "The implications of hyperbolic discounting for project evaluation," Policy Research Working Paper Series 1943, The World Bank.
  5. Hugh Gravelle & Dave Smith, 2001. "Discounting for health effects in cost-benefit and cost-effectiveness analysis," Health Economics, John Wiley & Sons, Ltd., vol. 10(7), pages 587-599.
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  1. > Environmental and Natural Resource Economics > Climate economics > Discounting, equity, uncertainty
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