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Minimax regret discounting

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  • Iverson, Terrence

Abstract

The paper considers an environmental policy decision in which the appropriate approach for discounting future costs and benefits is unknown. Uncertainty about the discount rate is formulated as a decision under Knightian uncertainty. To solve this, we employ minimax regret, a decision criterion that is much less conservative then the related criterion maximin—in particular, it can be shown to implement a “proportional response” in that it equally balances concern about the mistake of doing too little with that of doing too much. Despite the criterion's balanced nature, the minimax regret solution mimics a policy that maximizes the present discounted value of future net benefits with an effective (certainty-equivalent) discount rate that declines over time to the lowest possible rate. In addition to reinforcing Weitzman's (1998) original limiting result, the approach generates concrete policy advice when decision makers are unable to specify a prior over possible discount rates. We apply it to the Stern–Nordhaus discounting debate and find that the effective discount rate converges to the Stern rate in just under 200years.

Suggested Citation

  • Iverson, Terrence, 2013. "Minimax regret discounting," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 598-608.
  • Handle: RePEc:eee:jeeman:v:66:y:2013:i:3:p:598-608 DOI: 10.1016/j.jeem.2013.05.003
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    References listed on IDEAS

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    Cited by:

    1. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    2. Terrence Iverson & Scott Denning & Sammy Zahran, 2015. "When the long run matters," Climatic Change, Springer, vol. 129(1), pages 57-72, March.

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