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On the Underestimation of the Precautionary Effect in Discounting*

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  • Christian Gollier

    (Toulouse School of Economics, Manufacture des Tabacs, 21 Allée de Brienne, 31000 Toulouse, France)

Abstract

Using the extended Ramsey rule, the socially efficient rate is the difference between a wealth effect and a precautionary effect of economic growth. This second effect is increasing in the degree of uncertainty affecting the future. In the literature, it is usually calibrated by estimating the historical volatility of the growth of GDP in a specific country. In this paper, I show that using cross-section data tends to magnify uncertainty, and to reduce the discount rate. Using a data set covering 190 countries over the period 1969–2010, I justify using a much smaller discount rate of approximately 0.7 per cent per year for time horizons exceeding 40 years.

Suggested Citation

  • Christian Gollier, 2011. "On the Underestimation of the Precautionary Effect in Discounting*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 36(2), pages 95-111, December.
    • Handle: RePEc:pal:genrir:v:36:y:2011:i:2:p:95-111
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    Cited by:

    1. van der Ploeg, Frederick & ,, 2018. "Pricing Carbon Under Economic and Climactic Risks: Leading-Order Results from Asymptotic Analysis," CEPR Discussion Papers 12642, C.E.P.R. Discussion Papers.
    2. Ton S. van den Bremer & Frederick van der Ploeg, 2021. "The Risk-Adjusted Carbon Price," American Economic Review, American Economic Association, vol. 111(9), pages 2782-2810, September.
    3. Olijslagers, Stan & van der Ploeg, Frederick & van Wijnbergen, Sweder, 2023. "On current and future carbon prices in a risky world," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    4. Rick Van der Ploeg, 2020. "Discounting And Climate Policy," OxCarre Working Papers 244, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    5. Frederick Ploeg, 2021. "Carbon pricing under uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1122-1142, October.
    6. Kathrin Goldmann, 2019. "Time-declining risk-adjusted social discount rates for transport infrastructure planning," Transportation, Springer, vol. 46(1), pages 17-34, February.
    7. David Ceballos Hornero & Samuel Mongrut Montalván, 2021. "The Entrepreneurial Social Discount Rate: Risk Premium and Loss Aversion in New Ventures," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(4), pages 1-24, Octubre -.

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