Discounting in the Long Run Tim Swanson Reviewing Groom et. al.

Ramsey Discounting

Discount rates – pure time preference Is pure time preference indefensible?

Discounting – pure time preference Axiomatic approach:

Discounting – pure time pref The Empirical “fit”

Discount rates – pure time preference Constant rates – pros: Constant rates – cons:

Should DDRs be used? CBA is used to assess the NPV of a given project For projects with long term implications, this is means by which the current generation assesses the flow of “prices” (costs, benefits) to result from the decision to invest in a given asset  Sustainability requires that forward-looking prices are accurate, and discounting determines level of future prices

DDRs – deterministic case Components of SDR:

Justifications for DDRs? Deterministic case Declining expected growth:

Declining DDRs - Deterministic Weitzman’s “Wedge” between different rates:

Declining DDRs – deterministic case Weitzman’s Wedge:

Terminology

DDRs - Uncertainty Weitzman:

DDRs - Uncertainty Weitzman - DDRs:

Declining DDRs - Uncertainty Weitzman’s argument:

Declining DDRs - Uncertainty

Declining DDRs Gollier’s Comment on Weitzman:

Declining DDRs - Uncertainty Gollier on Weitzman:

Declining DDRs - uncertainty Gollier on Weitzman – bearing of risk:

Declining DDRs - Uncertainty Gollier – precautionary savings:

Discounting - Uncertainty Gollier – precautionary savings: