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Gamma Discounting

Author

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  • Martin L. Weitzman

Abstract

A critical problem, which has long plagued cost-benefit analysis, concerns the appropriate interest rate to use for discounting the future. This paper proposes a new approach to resolving the dilemma of the unknown discount rate, by incorporating the uncertainty directly into the analysis. An operational methodology is developed to determine the time-dependent schedule of effective interest rates appropriate for discounting long-term environmental projects or activities, like mitigating the effects of global warming. A numerical example is constructed from the results of a survey based on the opinions of 1,720 economists. Implications and ramifications of the proposed "gamma-discounting" approach are discussed.

Suggested Citation

  • Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:1843
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    References listed on IDEAS

    as
    1. Cropper, Maureen & Laibson, David, 1998. "The implications of hyperbolic discounting for project evaluation," Policy Research Working Paper Series 1943, The World Bank.
    2. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
    3. 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.
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    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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