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What's the rate? Disentangling the Weitzman and the Gollier effect

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  • Traeger, Christian P.

Abstract

The uncertainty of future economic development affects the term structure of discount rates and, thus, the intertemporal weights that are tobe used in cost benefit analysis. The U.K. and France have recently adopteda falling term structure to incorporate uncertainty and the U.S. is consideringa similar step. A series of publications discusses the following concern: Aseemingly analogous argument used to justify falling discount rates can alsobe used to justify increasing discount rates. We show that increasing anddecreasing discount rates mean different things, can coexist, are created bydifferent channels through which risk affects evaluation, and have the samequalitative effect of making long-term payoffs more attractive.

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Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt88x3d1vw.

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Date of creation: 01 Feb 2012
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Handle: RePEc:cdl:agrebk:qt88x3d1vw

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Keywords: Agriculture; Agriculture Operations; and Related Sciences; Economics; benefit cost analysis; discounting; term structure; uncertainty; Weitzman-Gollier puzzle;

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  1. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, vol. 1(2), pages 85-89, June.
  2. Christian Gollier, 2009. "Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule," CESifo Working Paper Series 2643, CESifo Group Munich.
  3. Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," TSE Working Papers 09-107, Toulouse School of Economics (TSE).
  4. 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.
  5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  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. 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.
  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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