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The Consumption Discount Rate for the Distant Future (if we do not die out)

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  • Koen Vermeylen

    (University of Amsterdam)

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    Abstract

    Gollier and Weitzman (2010) show that if future consumption discount rates are uncertain and persistent, the consumption discount rate should decline to its lowest possible value for events in the most distant future. In this paper, I argue that the lowest possible growth rate of consumption per capita in the distant future is zero (assuming that humans do not die out). Substituting in the Ramsey rule shows then that the lowest possible consumption discount rate for the distant future is equal to the lowest possible utility discount rate of the population (according to the descriptive approach to parameterizing the Ramsey rule) or to the utility discount rate of the social evaluator (according to the prescriptive approach). In both cases, there are strong reasons to set the consumption discount rate for the distant future at a value which is virtually zero.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-201/VI.

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    Date of creation: 16 Dec 2013
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    Handle: RePEc:dgr:uvatin:20130201

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: discount rate; climate change; cost-benefit analysis; prescriptive; descriptive;

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    1. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 171-186, December.
    2. Charles I. Jones, . "Sources of U.S. Economic Growth in a World of Ideas," Working Papers 98009, Stanford University, Department of Economics.
    3. Cameron Hepburn & Phoebe Koundouri & Ekaterini Panopoulou & Theologos Pantelidis, 2006. "Social Discounting Under Uncertainty: A cross-country comparison," The Institute for International Integration Studies Discussion Paper Series iiisdp177, IIIS.
    4. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
    5. Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
    6. Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," IDEI Working Papers 588, Institut d'Économie Industrielle (IDEI), Toulouse.
    7. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
    8. Nelson, Julie A., 2008. "Economists, value judgments, and climate change: A view from feminist economics," Ecological Economics, Elsevier, vol. 65(3), pages 441-447, April.
    9. Christian Gollier & Richard Zeckhauser, 2005. "Aggregation of Heterogeneous Time Preferences," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 878-896, August.
    10. 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.
    11. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
    12. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
    13. Kremer, Michael, 1993. "Population Growth and Technological Change: One Million B.C. to 1990," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 681-716, August.
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