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Yes, we should discount the far-distant future at its lowest possible rate: A resolution of the Weitzman-Gollier puzzle

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  • Freeman, Mark C.
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    Abstract

    In this paper the author proves that the Expected Net Future Value (ENFV) criterion can lead a risk neutral social planner to reject projects that increase expected utility. By contrast, the Expected Net Present Value (ENPV) rule correctly identifies the economic value of the project. While the ENFV increases with uncertainty over future interest rates, the expected utility decreases because of the planner's desire to smooth consumption across time. This paper therefore shows that Weitzman (1998) is 'right' and that, within his economy, the far-distant future should be discounted at its lowest possible rate. --

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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2010-13
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    Bibliographic Info

    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 4 (2010)
    Issue (Month): 13 ()
    Pages: 1-21

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    Handle: RePEc:zbw:ifweej:201013

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    Related research

    Keywords: Discount rates; term structure; capital budgeting; interest rate uncertainty; environmental planning;

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    References

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    1. Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
    2. Newell, Richard G. & Pizer, William A., 2004. "Uncertain discount rates in climate policy analysis," Energy Policy, Elsevier, Elsevier, vol. 32(4), pages 519-529, March.
    3. Gollier, Christian, 2009. "Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule," TSE Working Papers, Toulouse School of Economics (TSE) 09-049, Toulouse School of Economics (TSE).
    4. 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.
    5. Eric Jacquier & Alex Kane & Alan J. Marcus, 2005. "Optimal Estimation of the Risk Premium for the Long Run and Asset Allocation: A Case of Compounded Estimation Risk," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(1), pages 37-55.
    6. 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.
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    Cited by:
    1. Traeger, Christian P., 2012. "What's the rate? Disentangling the Weitzman and the Gollier effect," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt88x3d1vw, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Gollier, Christian, 2014. "Gamma discounters are short-termist," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 828, Institut d'Économie Industrielle (IDEI), Toulouse.

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