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The Mechanics of the Weitzman-Gollier Puzzles

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  • Szekeres, Szabolcs

Abstract

The Weitzman-Gollier Puzzle was observed in a setting of risk neutrality. This paper extends its analysis to cases of constant proportional risk aversion and finds that the phenomenon of the puzzle is not confined to the case of risk neutrality. Weitzman discounting produces declining discount rates for risk aversion values below one, but increasing ones for higher degrees of risk aversion. The finding that Weitzman’s discounting is actually time reversed negative compounding is confirmed. As Weitzman certainty equivalent rates (CERs) pertain to the cost of storing resources, rather than to interest earned from investing them productively, they should not be used in the evaluation of investment projects. Discounting project net benefits with declining discount rates (DDR) is never justified.

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  • Szekeres, Szabolcs, 2015. "The Mechanics of the Weitzman-Gollier Puzzles," MPRA Paper 64286, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64286
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    References listed on IDEAS

    as
    1. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, vol. 1(2), pages 85-89, June.
    2. 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.
    3. 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.
    4. Szekeres, Szabolcs, 2015. "When should the distant future not be discounted at increasing discount rates?," MPRA Paper 63437, University Library of Munich, Germany.
    5. Sterner, Thomas & Tol, Richard S. J. & Weitzman, Martin L. & Pizer, William A. & Portney, Paul R. & Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newe, 2014. "Should Governments Use a Declining Discount Rate in Project Analysis?," Scholarly Articles 33373349, Harvard University Department of Economics.
    6. 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.
    7. Szekeres, Szabolcs, 2015. "Governments Should Not Use Declining Discount Rates in Project Analysis," MPRA Paper 63438, University Library of Munich, Germany.
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    More about this item

    Keywords

    Discount rate; uncertainty; declining discount rate; negative compounding.;
    All these keywords.

    JEL classification:

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

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