Optimal rotation with declining discount rate
In recent years it has been argued, from many perspectives, that the further into the future a value flow occurs, the lower is the appropriate discount rate for it. National governments are now beginning to authorise such declining discount rates. This viewpoint can be, and has been, formalised in various ways, and has been applied to evaluating forestry investments of given durations. When the optimal duration of investment is itself the issue, new problems arise. Lower discount rates make subsequent rotations longer than earlier ones, and for a given length more valuable than they would otherwise be. This affects the optimal length of earlier rotations, which in turn may affect the discount rate profile applicable to later ones. In the absence of analytical solutions for the optimal sequence of rotations, numerical protocols are needed. The results arising are mostly in accord with expectations. If the change of discount rate is due to expected changes of circumstance that are actually realised, then the optimal sequence of rotations will remain as initially determined. If, however, it is due merely to the particular time perspective of the present generation, rotations will be revised by future generations. This will lead to a sequence of rotations similar to that deemed optimal at the current short-term discount rate. The most important reductions in profitability caused by choosing the âwrongâ discounting protocol arise from the âwrongâ rate, rather than by using declining rates as such.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 17 (2011)
Issue (Month): 3 (August)
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/701775/description#description|
|Order Information:|| Postal: http://www.elsevier.com/wps/find/journaldescription.cws_home/701775/bibliographic|
References listed on IDEAS
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.:
- Hume, David, 1740. "A Treatise of Human Nature (III) Of Morals," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 3, number hume1740.
- Norman Henderson & Ian Bateman, 1995. "Empirical and public choice evidence for hyperbolic social discount rates and the implications for intergenerational discounting," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 5(4), pages 413-423, June.
- Fisher, Anthony C & Krutilla, John V, 1975. "Resource Conservation, Environmental Preservation, and the Rate of Discount," The Quarterly Journal of Economics, MIT Press, vol. 89(3), pages 358-70, August.
- 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.
- Stefan Bayer, 2003. "Generation-adjusted discounting in long-term decision-making," International Journal of Sustainable Development, Inderscience Enterprises Ltd, vol. 6(1), pages 1133-149.
- Cropper, Maureen L & Aydede, Sema K & Portney, Paul R, 1994. "Preferences for Life Saving Programs: How the Public Discounts Time and Age," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 243-65, May.
- E Kula, 1981. "Future generations and discounting rules in public sector investment appraisal," Environment and Planning A, Pion Ltd, London, vol. 13(7), pages 899-910, July.
- Price, Colin, 2010. "Low discount rates and insignificant environmental values," Ecological Economics, Elsevier, vol. 69(10), pages 1895-1903, August.
- Fuchs, Victor R & Zeckhauser, Richard, 1987. "Valuing Health--A "Priceless' Commodity," American Economic Review, American Economic Association, vol. 77(2), pages 263-68, May.
- Ainslie, George, 1991. "Derivation of "Rational" Economic Behavior from Hyperbolic Discount Curves," American Economic Review, American Economic Association, vol. 81(2), pages 334-40, May.
- Sumaila, Ussif R. & Walters, Carl, 2005. "Intergenerational discounting: a new intuitive approach," Ecological Economics, Elsevier, vol. 52(2), pages 135-142, January.
- Hepburn, Cameron J. & Koundouri, Phoebe, 2007. "Recent advances in discounting: Implications for forest economics," Journal of Forest Economics, Elsevier, vol. 13(2-3), pages 169-189, August.
- Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, vol. 35(3), pages 270-284, March.
- 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.
- C Price, 1984. "The sum of discounted consumption flows method: equity with efficiency?," Environment and Planning A, Pion Ltd, London, vol. 16(6), pages 829-833, June.
- Hume, David, 1739. "A Treatise of Human Nature (II) Of the Passions," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 2, number hume1739a.
- Hume, David, 1739. "A Treatise of Human Nature (I) Of the Understanding," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number hume1739.
- Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
When requesting a correction, please mention this item's handle: RePEc:eee:foreco:v:17:y:2011:i:3:p:307-318. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.