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What’s the Rate? Disentangling the Weitzman and the Gollier Effect

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  • Traeger, Christian P.

    ()
    (University of California, Berkeley. Dept of agricultural and resource economics)

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 be used to 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

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1121.

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Length: 27 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:are:cudare:1121

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Related research

Keywords: benefit cost analysis; discounting; term structure; uncertainty; Weitzman-Gollier puzzle;

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References

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  1. 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.
  2. Gollier, Christian, 2009. "Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule," TSE Working Papers 09-049, Toulouse School of Economics (TSE).
  3. 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.
  4. Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, vol. 107(3), pages 350-353, June.
  5. Gollier, Christian, 2003. "Maximizing the Expected Net Future Value as an Alternative Strategy to Gamma Discounting," IDEI Working Papers 213, Institut d'Économie Industrielle (IDEI), Toulouse.
  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.
  7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  8. Freeman, Mark C., 2010. "Yes, we should discount the far-distant future at its lowest possible rate: A resolution of the Weitzman-Gollier puzzle," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 4(13), pages 1-21.
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Cited by:
  1. Mark C. Freeman & Ben Groom, 2013. "How certain are we about the certainty-equivalent long term social discount rate?," Grantham Research Institute on Climate Change and the Environment Working Papers 138, Grantham Research Institute on Climate Change and the Environment.
  2. Mark C. Freeman & Ben Groom & Ekaterini Panopoulou & Theologos Pantelidis, 2013. "Declining discount rates and the Fisher Effect: Inflated past, discounted future?," Grantham Research Institute on Climate Change and the Environment Working Papers 109, Grantham Research Institute on Climate Change and the Environment.

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