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Yes, we should discount the far-distant future at its lowest possible rate: a resolution of the Weitzman-Gollier puzzle

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Author Info
Freeman, Mark C.
Abstract

In this paper the author proves that the Expected Net Future Value (ENFV) criterion can lead a risk neutral social planner to reject projects that increase expected utility. By contrast, the Expected Net Present Value (ENPV) rule correctly identifies the economic value of the project. While the ENFV increases with uncertainty over future interest rates, the expected utility decreases because of the planner's desire to smooth consumption across time. This paper therefore shows that Weitzman (1998) is right and that, within his economy, the far-distant future should be discounted at its lowest possible rate. --

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2009-42.

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Date of creation: 2009
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Handle: RePEc:zbw:ifwedp:200942

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Related research
Keywords: Discount rates; term structure; capital budgeting; interest rate uncertainty; environmental planning;

Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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This page was last updated on 2009-11-27.

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