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Generation-adjusted discounting in long-term decision-making

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  • Stefan Bayer

Abstract

This paper analyses the choice of an inter-generational discount rate as well as a method for inter-generational discounting. It is shown that the pure time preference rate is irrelevant for inter-generational comparisons. However, the application of the growth time preference rate - with respect to consumption - is a necessary condition for inter-temporal utility maximisation. Opportunity costs should be taken into account not by discounting with their internal rate of return, but by calculating consumption equivalents (shadow prices of capital). Thus, an intergenerational discount rate has to be based on the time preference approach. These considerations lead us to the formulation of a new discounting technique, "Generation Adjusted Discounting" (GAD). It takes into account intra- as well as inter-generational aspects. Compared with conventional discounting techniques, we find that the present values obtained by using the GAD noticeably exceed those derived conventionally.

Suggested Citation

  • Stefan Bayer, 2003. "Generation-adjusted discounting in long-term decision-making," International Journal of Sustainable Development, Inderscience Enterprises Ltd, vol. 6(1), pages 1133-1149.
    • Handle: RePEc:ids:ijsusd:v:6:y:2003:i:1:p:1133-149
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    Citations

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    Cited by:

    1. Price, Colin, 2010. "Low discount rates and insignificant environmental values," Ecological Economics, Elsevier, vol. 69(10), pages 1895-1903, August.
    2. Lee, Ji Yun & Ellingwood, Bruce R., 2017. "A decision model for intergenerational life-cycle risk assessment of civil infrastructure exposed to hurricanes under climate change," Reliability Engineering and System Safety, Elsevier, vol. 159(C), pages 100-107.
    3. Stefan Bayer, 2004. "Nachhaltigkeitskonforme Diskontierung: das Konzept des "Generation Adjusted Discounting"," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 73(1), pages 142-157.
    4. Price, Colin, 6. "Optimal Rotation under Continually – or Continuously – Declining Discount Rate," Scandinavian Forest Economics: Proceedings of the Biennial Meeting of the Scandinavian Society of Forest Economics, Scandinavian Society of Forest Economics, issue 42, April.
    5. Stefan Bayer, 2003. "Generelle Nichtdiskontierung als Bedingung für eine nachhaltige Entwicklung?," IAW Discussion Papers 13, Institut für Angewandte Wirtschaftsforschung (IAW).
    6. Colin, Price, 2011. "Optimal rotation with declining discount rate," Journal of Forest Economics, Elsevier, vol. 17(3), pages 307-318, August.
    7. Brazee, Richard J., 2018. "Impacts of declining discount rates on optimal harvest age and land expectation values," Journal of Forest Economics, Elsevier, vol. 31(C), pages 27-38.
    8. Stefan Bayer & Claudia Kemfert, 2002. "Reaching National Kyoto Targets in Germany and Sustainable Development," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 4(4), pages 371-390, December.
    9. Stefan Bayer & Jacques Méry, 2009. "Sustainability gaps in municipal solid waste management: a case study for landfills," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 11(1), pages 43-69, February.
    10. Damien J.A. BAZIN & Sylvie FERRARI & Richard B. HOWARTH, 2018. "Introducing Environmental Ethics into Economic Analysis: Some insights from Hans Jonas’ Responsibility Principle," Cahiers du GREThA (2007-2019) 2018-17, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).

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