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Discounting under disagreement

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  • Geoffrey Heal
  • Antony Millner

Abstract

A group of time consistent agents has access to a common productive resource stock whose output provides their consumption needs. The agents disagree about the appropriate pure rate of time preference to use when choosing a consumption policy, and thus delegate the management of the resource to a social planner who allocates consumption efficiently across individuals and over time. We show that the planner's optimal policy is equivalent to that of a representative agent with a time varying rate of impatience. The representative agent's time preferences depend on the distribution of time preferences in the group, on the agents' tolerance for consumption uctuations, and on the productivity of the resource. The representative agent's rate of impatience coincides with that of the individual with the lowest rate of impatience in the long run, and under plausible conditions, is monotonically declining. In the work-horse case of iso-elastic felicity functions, and Gamma distributed rates of impatience, analytic solutions are possible, and the representative agent has hyperbolic time preferences. We thus provide a normative justification for the use of declining rates of time preference in dynamic welfare analysis.

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Bibliographic Info

Paper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 112.

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Date of creation: Apr 2013
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Handle: RePEc:lsg:lsgwps:wp112

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  1. Karp, Larry S, 2004. "Global warming and hyperbolic discounting," CUDARE Working Paper Series 0934R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  2. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
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  14. 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.
  15. Heal, Geoffrey, 2005. "Intertemporal Welfare Economics and the Environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 21, pages 1105-1145 Elsevier.
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