On the Underestimation of the Precautionary Effect in Discounting
Using the extended Ramsey rule, the socially efficient rate is the difference between a wealth effect and a precautionary effect of economic growth. This second effect is increasing in the degree of uncertainty affecting the future. In the literature, it is usually calibrated by estimating the historical volatility of the growth of GDP in a specific country. In this paper, I show that using cross-section data tends to magnify uncertainty, and to reduce the discount rate. Using a data set covering 190 countries over the period 1969-2010, I justify using a much smaller discount rate around 0.7% per year for time horizons exceeding 40 years.
|Date of creation:||2011|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
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.:
- Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
- GOLLIER Christian, 2008.
"Discounting with fat-tailed economic growth,"
LERNA Working Papers
08.19.263, LERNA, University of Toulouse.
- Gollier, Christian & Weitzman, Martin, 2009.
"How Should the Distant Future be Discounted When Discount Rates are Uncertain?,"
TSE Working Papers
09-107, Toulouse School of Economics (TSE).
- Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, vol. 107(3), pages 350-353, June.
- Christian Gollier & Martin L. Weitzman, 2009. "How Should the Distant Future be Discounted when Discount Rates are Uncertain?," CESifo Working Paper Series 2863, CESifo Group Munich.
- Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," IDEI Working Papers 588, Institut d'Économie Industrielle (IDEI), Toulouse.
- Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
- Dreze, Jacques H. & Modigliani, Franco, 1972.
"Consumption decisions under uncertainty,"
Journal of Economic Theory,
Elsevier, vol. 5(3), pages 308-335, December.
- Miles S. Kimball, 1989.
"Precautionary Saving in the Small and in the Large,"
NBER Working Papers
2848, National Bureau of Economic Research, Inc.
- Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
- Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3536. 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: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.