AbstractWhich rates should we use to discount costs and benefits of different natures at different time horizons? We answer this question by considering a representative agent consuming two goods whose availability evolves over time in a stochastic way. We extend the Ramsey rule by taking into account the degree of substitutability between the two goods and of the uncertainty surrounding the economic and environmental growths. The rate at which environmental impacts should be discounted is in general different from the one at which monetary benefits should be discounted. We provide arguments in favor of an ecological discount rate smaller than the economic discount rate. In particular, we show that, under certainty and Cobb-Douglas preferences, the difference between the economic and the ecological discount rates equals the difference between the economic and the ecological growth rates. Using data about the link between biodiversity and economic development, I estimate that the rate at which changes in biodiversity should be discounted is 1.5%, whereas changes in consumption should be discounted at 3.2%.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 524.
Date of creation: Jul 2009
Date of revision:
Publication status: Published in Journal of Economic Theory, vol.�145, n°2, mars 2010, p.�812-829.
Contact details of provider:
Postal: Manufacture des Tabacs, Aile Jean-Jacques Laffont, 21 Allée de Brienne, 31000 TOULOUSE
Phone: +33 (0)5 61 12 85 89
Fax: + 33 (0)5 61 12 86 37
Web page: http://www.idei.fr/
More information through EDIRC
Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Narayana R. Kocherlakota, 1996.
"The Equity Premium: It's Still a Puzzle,"
Journal of Economic Literature,
American Economic Association, vol. 34(1), pages 42-71, March.
- Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
- Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
- Traeger, Christian P., 2011.
"Sustainability, limited substitutability, and non-constant social discount rates,"
Journal of Environmental Economics and Management,
Elsevier, vol. 62(2), pages 215-228, September.
- Traeger, Christian P, 2007. "Sustainability, limited substitutability and non-constant social discount rates," CUDARE Working Paper Series 1045, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- Traeger, Christian P., 2008. "Sustainability, Limited Substitutability and Non-Constant Social Discount Rates," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt10d7d7n4, Department of Agricultural & Resource Economics, UC Berkeley.
- Louis Eeckhoudt & Harris Schlesinger, 2005.
"Putting Risk in its Proper Place,"
CESifo Working Paper Series
1462, CESifo Group Munich.
- Stengos, T. & Millimet, D.L. & List, J.A., 2002.
"The Environmental Kuznets Curve: Real Progress or Misspecified Models?,"
2002-13, University of Guelph, Department of Economics and Finance.
- Daniel L. Millimet & John A. List & Thanasis Stengos, 2003. "The Environmental Kuznets Curve: Real Progress or Misspecified Models?," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1038-1047, November.
- Weikard, Hans-Peter & Zhu, Xueqin, 2005. "Discounting and environmental quality: When should dual rates be used?," Economic Modelling, Elsevier, vol. 22(5), pages 868-878, September.
- Ekaterini Panopoulou & Ben Groom & Phoebe Koundouri & Theologos Pantelidis, 2004. "An Econometric Approach To Estimating Long-Run Discount Rates," Royal Economic Society Annual Conference 2004 70, Royal Economic Society.
- Louis Eeckhoudt & Béatrice Rey & Harris Schlesinger, 2007.
"A Good Sign for Multivariate Risk Taking,"
INFORMS, vol. 53(1), pages 117-124, January.
- Louis Eeckhoudt & Béatrice Rey & Harris Schlesinger, 2006. "A Good Sign for Multivariate Risk Taking," CESifo Working Paper Series 1796, CESifo Group Munich.
- EECKHOUDT, louis & REY, Béatrice & SCHLESINGER, Harris, . "A good sign for multivariate risk taking," CORE Discussion Papers RP -1900, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Sterner, Thomas & Persson, U. Martin, 2007.
"An Even Sterner Review: Introducing Relative Prices into the Discounting Debate,"
dp-07-37, Resources For the Future.
- Thomas Sterner & U. Martin Persson, 2008. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 61-76, Winter.
- Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
- Christian Gollier, 2005.
"The Consumption-Based Determinants of the Term Structure of Discount Rates,"
CESifo Working Paper Series
1375, CESifo Group Munich.
- Gollier, Christian, 2004. "The Consumption-Based Determinants of the Term Structure of Discount Rates," IDEI Working Papers 296, Institut d'Économie Industrielle (IDEI), Toulouse.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Miles S. Kimball, 1991.
"Standard Risk Aversion,"
NBER Technical Working Papers
0099, National Bureau of Economic Research, Inc.
- Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
- Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART - LERECO 14-01, INRA UMR SMART.
- Gollier, Christian, 2012.
"Asset pricing with uncertain betas: A long-term perspective,"
IDEI Working Papers
752, Institut d'Économie Industrielle (IDEI), Toulouse.
- Christian Gollier, 2013. "Asset Pricing with Uncertain Betas: A Long-Term Perspective," CESifo Working Paper Series 4072, CESifo Group Munich.
- Gollier, Christian, 2012. "Asset pricing with uncertain betas: A long-term perspective," TSE Working Papers 12-354, Toulouse School of Economics (TSE).
- Joachim Fuenfgelt & Stefan Baumgaertner, 2012. "A utilitarian notion of responsibility for sustainability," Working Paper Series in Economics 234, University of Lüneburg, Institute of Economics.
- Gollier, Christian, 2013.
"A theory of rational short-termism with uncertain betas,"
IDEI Working Papers
771, Institut d'Économie Industrielle (IDEI), Toulouse.
- Gollier, Christian, 2013. "A theory of rational short-termism with uncertain betas," TSE Working Papers 13-389, Toulouse School of Economics (TSE).
- Gollier, Christian, 2012. "A theory of rational short-termism with uncertain betas," LERNA Working Papers 12.14.371, LERNA, University of Toulouse.
- Jouini, Elyès & Napp, Clotilde & Nocetti, Diego, 2013.
"On multivariate prudence,"
Journal of Economic Theory,
Elsevier, vol. 148(3), pages 1255-1267.
- Defrancesco, Edi & Gatto, Paola & Rosato, Paolo, 2014. "A ‘component-based’ approach to discounting for natural resource damage assessment," Ecological Economics, Elsevier, vol. 99(C), pages 1-9.
- Johansson-Stenman, Olof & Sterner, Thomas, 2013.
"Discounting and Relative Consumption,"
Working Papers in Economics
559, University of Gothenburg, Department of Economics.
- Boyarchenko, Svetlana & Levendorskii, Sergei, 2010. "Discounting when income is stochastic and climate change policies," MPRA Paper 27998, University Library of Munich, Germany.
- M. Gallastegui & M. González-Eguino & I. Galarraga, 2012. "Cost effectiveness of a combination of instruments for global warming: a quantitative approach for Spain," SERIEs, Spanish Economic Association, vol. 3(1), pages 111-132, March.
- Kögel, Tomas, 2009. "On the Relation between Dual-Rate Discounting and Substitutability," Economics Discussion Papers 2009-10, Kiel Institute for the World Economy.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.