AbstractA critical problem, which has long plagued cost-benefit analysis, concerns the appropriate interest rate to use for discounting the future. This paper proposes a new approach to resolving the dilemma of the unknown discount rate, by incorporating the uncertainty directly into the analysis. An operational methodology is developed to determine the time-dependent schedule of effective interest rates appropriate for discounting long-term environmental projects or activities, like mitigating the effects of global warming. A numerical example is constructed from the results of a survey based on the opinions of 1,720 economists. Implications and ramifications of the proposed "gamma-discounting" approach are discussed.
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Bibliographic InfoPaper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1843.
Date of creation: 1998
Date of revision:
Other versions of this item:
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
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- 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.
- Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
- Cropper, Maureen & Laibson, David, 1998. "The implications of hyperbolic discounting for project evaluation," Policy Research Working Paper Series 1943, The World Bank.
RePEc Biblio mentionsAs found on the RePEc Biblio, the curated bibliography for Economics:
- > Environmental and Natural Resource Economics > Climate economics > Discounting, equity, uncertainty
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