Discounting and confidence
AbstractThe paper analyzes the discount rate under uncertainty. The analysis complements the probabilistic characterization of uncertainty by a measure of confidence. Special cases of the model comprise discounting under smooth ambiguity aversion as well as discounting under a disentanglement of risk aversion from aversion to intertemporal substitution. The paper characterizes the general class of preferences for which uncertainty implies a reduction of the discount rate. It also characterizes how the more comprehensive description of uncertainty changes the discount rate with respect to the standard model. The paper relates different results in the literature by switching between different risk measures. It presents a parametric extension of the Ramsey discounting formula that takes into account confidence into future growth estimates and a measure of aversion to the lack of confidence. If confidence decreases in the futurity of the growth forecast, the discount rates have a falling term structure even in the case of an iid growth process.
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Bibliographic InfoPaper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1117R.
Length: 41 pages
Date of creation: Jun 2011
Date of revision: Sep 2011
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Postal: University of California, Giannini Foundation of Agricultural Economics Library, 248 Giannini Hall #3310, Berkeley CA 94720-3310
Other versions of this item:
- Traeger, Christian P., 2011. "Discounting and confidence," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt61m836d1, Department of Agricultural & Resource Economics, UC Berkeley.
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D90 - Microeconomics - - Intertemporal Choice - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-20 (All new papers)
- NEP-MIC-2012-02-20 (Microeconomics)
- NEP-UPT-2012-02-20 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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