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Article
Gamma discounting and expected net future value
Journal of Environmental Economics and Management (2007)
  • Cameron J Hepburn
  • Ben Groom, SOAS
Abstract

Recent research suggests that the long term future should be discounted with a declining discount rate. One such line of research, exemplified by Weitzman (2001), shows that the certainty equivalent discount rate is declining when future capital productivity is uncertain. However, in a recent paper Gollier puts forward a puzzle that casts doubt on the validity of this conclusion. He asserts that using expected net future value, rather than conventional expected net present value, implies that the certainty equivalent discount rate increases over time. This paper resolves the apparent puzzle by encompassing the models of Gollier and Weitzman. In fact, Gollier proves that as the evaluation date moves further into the future, the discount rate at a given point in time will increase. However, given a particular evaluation date, the schedule of discount rates is declining.

Keywords
  • declining discount rates,
  • uncertainty,
  • intertemporal risk allocation
Disciplines
Publication Date
2007
Citation Information
Cameron J Hepburn and Ben Groom. "Gamma discounting and expected net future value" Journal of Environmental Economics and Management Vol. 53 Iss. 1 (2007)
Available at: http://works.bepress.com/hepburn/2/