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Discounting under Disagreement

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  • Geoffrey Heal
  • Antony Millner

Abstract

A group of agents disagree about the appropriate inter temporal preferences to use when exploiting a common productive resource. They thus delegate decision making to a social planner who allocates consumption efficiently across heterogeneous individuals and over time. We define `policy equivalent' representative agents as those agents whose optimal consumption plan reproduces the optimal aggregate consumption plan of the group, and find conditions that must be satisfied by all such representative preferences. We then show that any policy equivalent representative agent must have a rate of time preference that approaches the lowest rate in the population asymptotically. We characterize the term-structure of separable policy-equivalent preferences in the the case of common felicity functions, and show that if the felicity function is iso-elastic, and time preferences are gamma distributed, representative agents must have hyperbolic time preferences. This gives a normative significance to such preferences, which have hitherto been seen as an entirely behavioral phenomenon. Finally, we examine the temporal stability of representative preferences if the planner cannot commit to inter temporal allocations. We show that while consumption plans are not time consistent, they are renegotiation proof, and thus stable under proposals for change. We argue that this feature has normative appeal for public decision-making.

Suggested Citation

  • Geoffrey Heal & Antony Millner, 2013. "Discounting under Disagreement," NBER Working Papers 18999, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18999
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    Cited by:

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    3. Mikhail Pakhnin, 2021. "Collective Choice with Heterogeneous Time Preferences," CESifo Working Paper Series 9141, CESifo.
    4. Ram Fishman, 2019. "Heterogeneous Patience, Bargaining Power and Investment in Future Public Goods," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 1101-1107, August.
    5. Hänsel, Martin C. & Quaas, Martin F., 2018. "Intertemporal Distribution, Sufficiency, and the Social Cost of Carbon," Ecological Economics, Elsevier, vol. 146(C), pages 520-535.
    6. Barrage, Lint, 2018. "Be careful what you calibrate for: Social discounting in general equilibrium," Journal of Public Economics, Elsevier, vol. 160(C), pages 33-49.
    7. Maureen L. Cropper & Mark C. Freeman & Ben Groom & William A. Pizer, 2014. "Declining Discount Rates," American Economic Review, American Economic Association, vol. 104(5), pages 538-543, May.
    8. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    9. Kenneth J. Arrow & Maureen L. Cropper & Christian Gollier & Ben Groom & Geoffrey M. Heal & Richard G. Newell & William D. Nordhaus & Robert S. Pindyck & William A. Pizer & Paul R. Portney & Thomas Ste, 2014. "Editor's Choice Should Governments Use a Declining Discount Rate in Project Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(2), pages 145-163.
    10. Quaas, Martin F. & Quaas, Johannes & Rickels, Wilfried & Boucher, Olivier, 2017. "Are there reasons against open-ended research into solar radiation management? A model of intergenerational decision-making under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 1-17.
    11. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2013. "How capital-based instruments facilitate the transition toward a low-carbon economy : a tradeoff between optimality and acceptability," Policy Research Working Paper Series 6609, The World Bank.
    12. Terrence Iverson & Scott Denning & Sammy Zahran, 2015. "When the long run matters," Climatic Change, Springer, vol. 129(1), pages 57-72, March.
    13. Antony Millner, 2016. "Heterogeneous intergenerational altruism," GRI Working Papers 226, Grantham Research Institute on Climate Change and the Environment.
    14. Antony Millner & Geoffrey Heal, 2015. "Collective intertemporal choice: time consistency vs. time invariance," GRI Working Papers 220, Grantham Research Institute on Climate Change and the Environment.
    15. Eveson, Simon P. & Thijssen, Jacco J.J., 2016. "Pareto optimality and existence of quasi-equilibrium in exchange economies with an indefinite future," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 138-152.

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    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other

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