Discounting under disagreement
AbstractA 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.
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 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.
Date of creation: Apr 2013
Date of revision:
Other versions of this item:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D99 - Microeconomics - - Intertemporal Choice - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-22 (All new papers)
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.:
- Karp, Larry, 2005.
"Global warming and hyperbolic discounting,"
Journal of Public Economics,
Elsevier, vol. 89(2-3), pages 261-282, February.
- Karp, Larry, 2004. "Global Warming and Hyperbolic Discounting," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5zh730nc, Department of Agricultural & Resource Economics, UC Berkeley.
- 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.
- 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.
- Martin L. Weitzman, 2009.
"Risk-Adjusted Gamma Discounting,"
NBER Working Papers
15588, National Bureau of Economic Research, Inc.
- Martin L. Weitzman, 1998.
Harvard Institute of Economic Research Working Papers
1843, Harvard - Institute of Economic Research.
- Li, Chuan-Zhong & Lofgren, Karl-Gustaf, 2000. "Renewable Resources and Economic Sustainability: A Dynamic Analysis with Heterogeneous Time Preferences," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 236-250, November.
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
- 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.
- Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
- 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.
- 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.
- Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
- Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
- Ben Groom & Cameron Hepburn & Phoebe Koundouri & David Pearce, 2005. "Declining Discount Rates: The Long and the Short of it," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(4), pages 445-493, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The GRI Administration).
If references are entirely missing, you can add them using this form.