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Discounting the Long-Distant Future: A Simple Explanation for the Weitzman-Gollier-Puzzle

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  • Wolfgang Buchholz
  • Jan Schumacher

Abstract

In this paper, we reconsider the debate on Weitzman's (1998) suggestion to discount the long-run future at the lowest possible rate, referring to Gollier (2004) and Hepburn & Groom (2007). We show that, while Weitzman's use of the present value approach may indeed seem questionable, its outcome, i.e. a discount rate that is declining over time, is nevertheless reasonable, since it can be justified by assuming a plausible degree of risk aversion.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-07/cesifo1_wp2357.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2357.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2357

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Related research

Keywords: discount rates; uncertainty; risk aversion;

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References

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  1. David J. Evans, 2005. "The elasticity of marginal utility of consumption: estimates for 20 OECD countries," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 197-224, June.
  2. Jan Schumacher & Wolfgang Buchholz, 2008. "Discounting and Welfare Analysis Over Time: Choosing the ç," CESifo Working Paper Series 2230, CESifo Group Munich.
  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.
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Citations

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Cited by:
  1. Gollier, Christian, 2008. "Discounting with Fat-Tailed Economic Growth," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  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, 2008. "Should we discount the far-distant future at its lowest possible rate?," LERNA Working Papers 08.30.274, LERNA, University of Toulouse.
  4. 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).
  5. Freeman, Mark C., 2009. "Yes, we should discount the far-distant future at its lowest possible rate: a resolution of the Weitzman-Gollier puzzle," Economics Discussion Papers 2009-42, Kiel Institute for the World Economy.

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