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Discounting an uncertain future

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  • Gollier, Christian

Abstract

We discuss the selection of the socially optimal discount rate for public investment projects that entail costs and benefits in the very long run. More specifically, we examine in an expected utility framework how the uncertainty on the growth rate of the GNP per head affects this rate. Under various conditions on preferences, as positive prudence, decreasing relative risk aversion or decreasing absolute risk aversion, we prove that (1) the fact that growth is uncertain reduces the optimal discount rate, and that (2) this discount rate should be smaller the longer the time horizon is. We characterize the asymptotic value of the discount rate. We also examine the case of Kreps-Porteus social welfare functions.
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  • Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
  • Handle: RePEc:eee:pubeco:v:85:y:2002:i:2:p:149-166
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