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Debating about the Discount Rate:The Basic Economic Ingredients

  • Christian Gollier

In this paper, we describe the determinants of the socially efficient discount rate for the distant future. We provide various arguments in favour of a decreasing term structure. They are based on a precautionary argument given the rapid accumulation oif uncertainties affecting the future growth of our economies. We recommend a real discount rate of 2% for time horizons exceeding 50 years. A risk premium should be added to this rate if the project yields cash flows that are positively correlated with the growth of the economy. Copyright 2010 die Autoren Journal compilation 2010, Verein für Socialpolitik und Blackwell Publishing Ltd.

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Article provided by Verein für Socialpolitik in its journal Perspektiven der Wirtschaftspolitik.

Volume (Year): 11 (2010)
Issue (Month): s1 (05)
Pages: 38-55

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Handle: RePEc:bla:perwir:v:11:y:2010:i:s1:p:38-55
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  1. DREZE, Jacques H. & MODIGLIANI, Franco, . "Cosumption decisions under uncertainty," CORE Discussion Papers RP 119, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. 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.
  3. GOLLIER Christian, 2008. "Discounting with fat-tailed economic growth," LERNA Working Papers 08.19.263, LERNA, University of Toulouse.
  4. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
  5. 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.
  6. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
  7. EECKHOUDT, Louis & SCHLESINGER, Harris, . "Putting risk in its proper place," CORE Discussion Papers RP 1871, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
  9. 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.
  10. Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
  11. Wilfred Beckerman & Cameron Hepburn, 2007. "Ethics of the Discount Rate in the Stern Review on the Economics of Climate Change," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 187-210, January.
  12. 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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