Should governments use a declining discount rate in project analysis?

Review of Environmental Economics and Policy

Volumn 8, Issue 2, 2014, Pages 145-163

  Arrow, Kenneth J ^a   Cropper, Maureen L ^b   Gollier, Christian ^c   Groom, Ben ^d   Heal, Geoffrey M ^e   Newell, Richard G ^f   Nordhaus, William D ^g   Pindyck, Robert S ^h   Pizer, William A ^f   Portney, Paul R ⁱ   Sterner, Thomas ^j   Tol, Richard S J ^k   Weitzman, Martin L ^l  

^a STANFORD UNIVERSITY   (United States)

^b UNIVERSITY OF MARYLAND   (United States)

^c TOULOUSE SCHOOL OF ECONOMICS   (France)

^d LONDON SCHOOL OF ECONOMICS   (United Kingdom)

^e The Sanford C Bernstein Co Center for Leadership and Ethics   (Colombia)

^f DUKE UNIVERSITY   (United States)

^g YALE UNIVERSITY   (United States)

^h MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

ⁱ UNIVERSITY OF ARIZONA   (United States)

^j UNIVERSITY OF GOTHENBURG   (Sweden)

^k UNIVERSITY OF SUSSEX   (United Kingdom)

^l HARVARD UNIVERSITY   (United States)

more..

Author keywords

[No Author keywords available]

Indexed keywords

COST-BENEFIT ANALYSIS; DISCOUNT RATE; ENVIRONMENTAL PROTECTION; GOVERNMENT; PROJECT ASSESSMENT;

EID: 84904745360     PISSN: 17506816     EISSN: 17506824     Source Type: Journal    
DOI: 10.1093/reep/reu008     Document Type: Article

References (49)

1. Arrow, K. J., W. R. Cline, K.-G. Maler, M. Munasinghe, R. Squitieri, and J. E. Stiglitz. 1996. Intertemporal equity, discounting, and economic efficiency. In Climate change 1995: Economic and social dimensions of climate change, contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change, ed. J. P. Bruce, H. Lee, and E. F. Haites. Cambridge, UK: Cambridge University Press.
2. Atkinson, Giles, Simon Dietz, Jennifer Helgeson, Cameron Hepburn, and Håkon Sælen. 2009. Siblings, not triplets: Social preferences for risk, inequality and time in discounting climate change. Economics: The Open-Access, Open-Assessment EJournal 3 (2009-26).
3. Barro, Robert J. 2006. Rare disasters and asset markets in the twentieth century. Quarterly Journal of Economics 121: 823-66.
4. Barro, Robert J. 2009. Rare disasters, asset prices, and welfare costs. American Economic Review 99:243-64.
5. Bates, J. M., and C. W. J. Granger. 1969. The combination of forecasts. Operational Research Quarterly 20: 451-68.
6. Cecchetti, Stephen G., Pok-sang Lam, and Nelson C. Mark. 2000. Asset pricing with distorted beliefs: Are equity returns too good to be true? American Economic Review 90 (4): 787-805.
7. Cochrane, J. H. 1988. How big is the random walk in GNP? Journal of Political Economy 96:893-920.
8. Dasgupta, Partha. 2008. Discounting climate change. Journal of Risk and Uncertainty 37:141-69.
9. Dasgupta, P., S. A. Marglin, and A. Sen. 1972. Guidelines for project evaluation. New York: United Nations.
10. Epstein, L. G., and S. Zin. 1991. Substitution, risk aversion and the temporal behavior of consumption and asset returns: An empirical framework. Journal of Political Economy 99: 263-86.
11. Freeman, M. C., and B. Groom. Forthcoming. Positively gamma discounting: Combining the opinions of experts on the social discount rate. Economic Journal.
12. Freeman, M., B. Groom, K. Panipoulou, and T. Pantelides. 2013. Declining discount rates and the Fisher effect: Inflated past, discounted future. Centre for Climate Change Economics and Policy Working Paper No. 129.
13. Gollier, Christian. 2002. Time horizon and the discount rate. Journal of Economic Theory 107:463-73.
14. Gollier, Christian. 2008. Discounting with fat-tailed economic growth. Journal of Risk and Uncertainty 37: 171-86.
15. Gollier, Christian. 2011. On the understanding of the precautionary effect in discounting. Geneva Risk and Insurance Review 36: 95-111.
16. Gollier, Christian. 2012. Pricing the planet's future:The economics of discounting in an uncertain world. Princeton, NJ: Princeton University Press.
17. Gollier, Christian, Phoebe Koundouri, and Theologos Pantelidis. 2008. Declining discount rates: Economic justifications and implications for long-run policy. Economic Policy 23: 757-95.
18. Gollier, C., and M. Weitzman. 2010. How should the distant future be discounted when discount rates are uncertain? Economics Letters 107 (3):350-53.
19. Gollier, C., and R. Zeckhauser. 2005.. Aggregation of heterogeneous time preferences. Journal of Political Economy 113 (4): 878-96.
20. Goulder, L. H., and R. Williams. 2012.. The choice of discount rate for climate change policy evaluation. Climate Change Economics 3 (4): 1-18.
21. Groom, B., P. Koundouri, E. Panopoulou, and T. Pantelidis. 2007. Discounting the distant future:How much does model selection affect the certainty equivalent rate? Journal of Applied Econometrics 22: 641-56.
22. Groom, B., and D. Maddison. 2013. Non-identical quadruplets: Four new estimates of the elasticity of marginal utility for the UK. Grantham Research Institute on Climate Change Economics and the Environment, Working Paper No. 121. London School of Economics.
23. HM Treasury. 2003. Green book. http://www.hmtreasury.gov.uk/data_greenbook_index.htm (accessed June 6, 2014).
24. Heal, G. M. 2005. Intertemporal welfare economics and the environment. In Handbook of environmental economics, Vol. 3, ed. K.-G.Maler, and J. R. Vincent, 1105-45. Amsterdam: Elsevier North Holland.
25. Heal, Geoffrey, and Anthony Millner. 2013. Discounting under disagreement. NBER Working Paper 18999.
26. Hepburn, C., P. Koundouri, E. Panopoulous, and T. Pantelidis. 2009. Social discounting under uncertainty:A cross-country comparison. Journal of Environmental Economics and Management 57:140-150.
27. Jouini, E., J.-M. Marin, and C. Napp. 2010. Discounting and divergence of opinion. Journal of Economic Theory 145: 830-59.
28. Kocherlakota, N. R. 1996. The equity premium: It's still a puzzle. Journal of Economic Literature 34:42-71.
29. Lebr̀gue, Daniel. 2005. Révision du taux d'actualisation des investissements publics. Rapport du Groupe d'Experts, Commisariat Général du Plan. http://catalogue.polytechnique.fr/site.php?id1/4324&.leid1/42389 (accessed June 6, 2014).
30. Mankiw, G. 1981. The permanent income hypothesis and the real interest rate. Economics Letters 7:307-11.
31. Meyer, Donald, and Jack Meyer. 2005. Relative risk aversion: What do we know? Journal of Risk and Uncertainty 31: 243-62.
32. Newell, R., and W. Pizer. 2003. Discounting the distant future: How much do uncertain rates increase valuations? Journal of Environmental Economics and Management 46 (1): 52-71.
33. Nordhaus, W. D. 1994. Managing the global commons:The economics of climate change. Cambridge, MA: MIT Press.
34. Nordhaus, W. D. 2007.. The Stern review on the economics of climate change. Journal of Economic Literature 45 (3): 686-702.
35. Office of Management and Budget (OMB). 2003. Circular A-4: Regulatory analysis. Washington, DC:Executive Office of the President. http://www.whitehouse.gov/omb/circulars/ (accessed June 6, 2014).
36. Oxera. 2002. A social time preference rate for use in long-term discounting. Oxford, UK:Office of the Deputy Prime Minister, Department for Transport and Department of the Environment, Food and Rural Affairs. http://www.communities.gov.uk/documents/corporate/pdf/146862.pdf (accessed June 6, 2014).
37. Pindyck, Robert S., and Neng Wang. 2013. The economic and policy consequences of catastrophes. American Economic Journal: Economic Policy 5 (4):306-39.
38. Ramsey, F. P. 1928.. A mathematical theory of saving. Economic Journal 38 (4): 543-49.
39. Stern, N. 2006. The economics of climate change:The Stern review. Cambridge, UK: Cambridge University Press.
40. Sterner, T., M. Damon, and K. Mohlin. Forthcoming. Putting a price on the welfare of our children and grandchildren. In Cost-benefit analysis and environmental decision-making in developing and emerging countries, ed. M. A. Livermore, and R. L. Revesz. Oxford, UK, and New York: Oxford University Press.
41. Strotz, R. H. 1955.. Myopia and inconsistency in dynamic utility maximization. Review of Economic Studies 23 (3): 165-80.
42. Thomas, L. B. 1999. Survey measures of expected U.S. inflation. Journal of Economic Perspectives 13:125-44.
43. Tol, R. S. J. 2010.. International inequity aversion and the social cost of carbon. Climate Change Economics 1 (1): 21-32.
44. Traeger, C. P. 2009.. Recent developments in the intertemporal modeling of uncertainty. Annual Review of Resource Economics 1 (1): 26-85.
45. Weil, P. 1990. Nonexpected utility in macroeconomics. Quarterly Journal of Economics 105 (1):29-42.
46. Weitzman, M. L. 1998. Why the far-distant future should be discounted at its lowest possible rate. Journal of Environmental Economics and Management 36: 201-8.
47. Weitzman, M. L. 2001. Gamma discounting. American Economic Review 91: 260-71.
48. Weitzman, M. L. 2004. Discounting a distant future whose technology is unknown. http://www.sv.uio.no/econ/forskning/aktuelt/arrangementer/torsdagseminaret/2004/torsdag-v04/weitzman-1.pdf (accessed June 6, 2014).
49. Weitzman, M. L. 2007. Subjective expectations and assetreturn puzzles. American Economic Review 97:1102-30.