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Yes, we should discount the far-distant future at its lowest possible rate: A resolution of the Weitzman-Gollier puzzle

  • Freeman, Mark C.
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    In this paper the author proves that the Expected Net Future Value (ENFV) criterion can lead a risk neutral social planner to reject projects that increase expected utility. By contrast, the Expected Net Present Value (ENPV) rule correctly identifies the economic value of the project. While the ENFV increases with uncertainty over future interest rates, the expected utility decreases because of the planner's desire to smooth consumption across time. This paper therefore shows that Weitzman (1998) is 'right' and that, within his economy, the far-distant future should be discounted at its lowest possible rate.

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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2010-13
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    File URL: http://econstor.eu/bitstream/10419/30330/1/624790592.pdf
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    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 4 (2010)
    Issue (Month): ()
    Pages: 1-21

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    Handle: RePEc:zbw:ifweej:201013
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    1. 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.
    2. Newell, Richard G. & Pizer, William A., 2004. "Uncertain discount rates in climate policy analysis," Energy Policy, Elsevier, vol. 32(4), pages 519-529, March.
    3. Gollier, Christian, 2009. "Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule," TSE Working Papers 09-049, Toulouse School of Economics (TSE).
    4. Eric Jacquier & Alex Kane & Alan J. Marcus, 2005. "Optimal Estimation of the Risk Premium for the Long Run and Asset Allocation: A Case of Compounded Estimation Risk," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(1), pages 37-55.
    5. GOLLIER Christian & KOUNDOURI Phoebe & PANTELIDIS Theologos, 2008. "Declining Discount Rates : Economic Justifications and Implications for Long-Run Policy," LERNA Working Papers 08.17.261, LERNA, University of Toulouse.
    6. Ekaterini Panopoulou & B. Groom & P. Koundouri & Theologos Pantelidis, 2005. "Discounting the distant future: How much does model selection affect the certainty equivalent rate?," Economics, Finance and Accounting Department Working Paper Series n1480105, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    7. Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
    8. Hepburn, Cameron & Groom, Ben, 2007. "Gamma discounting and expected net future value," Journal of Environmental Economics and Management, Elsevier, vol. 53(1), pages 99-109, January.
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