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

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Cited by:
  1. Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 588, Institut d'Économie Industrielle (IDEI), Toulouse.
  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, 2009. "Should we Discount the Far-Distant Future at its Lowest Possible Rate?," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 3(25), pages 1-14.
  4. Gollier, Christian, 2014. "Gamma discounters are short-termist," TSE Working Papers, Toulouse School of Economics (TSE) 14-499, Toulouse School of Economics (TSE).
  5. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, Springer, vol. 37(2), pages 171-186, December.
  6. 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, Kiel Institute for the World Economy 2009-42, Kiel Institute for the World Economy.
  7. 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, Grantham Research Institute on Climate Change and the Environment 109, Grantham Research Institute on Climate Change and the Environment.

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