Discounting under Risk

2021 ◽  
pp. 67-89
Author(s):  
Maddalena Ferranna
Keyword(s):  
Climate Change ◽  
Discount Rate ◽  
Public Policies ◽  
Social Discount Rate ◽  
Climate Policies ◽  
The Social ◽  
Ramsey Rule ◽  
Climate Damages

The debate on the economics of climate change has focused primarily on the choice of the social discount rate, which plays a key role in determining the desirability of climate policies given the long-term impacts of climate damages. Discounted utilitarianism and the Ramsey Rule dominate the debate on discounting. The chapter examines the appropriateness of the utilitarian framework for evaluating public policies. More specifically, it focuses on the risky dimension of climate change, and on the failure of utilitarianism in expressing both concerns for the distribution of risks across the population and concerns for the occurrence of catastrophic outcomes. The chapter shows how a shift to the prioritarian paradigm is able to capture those types of concerns, and briefly sketches the main implications for the choice of the social discount rate.

scholarly journals Discounting Disentangled

2018 ◽  
Vol 10 (4) ◽  
pp. 109-134 ◽  
Author(s):  
Moritz A. Drupp ◽  
Mark C. Freeman ◽  
Ben Groom ◽  
Frikk Nesje
Keyword(s):  
Discount Rate ◽  
Time Preference ◽  
Wealth Effect ◽  
Social Discount Rate ◽  
Economic Values ◽  
Public Projects ◽  
Highly Sensitive ◽  
The Social ◽  
Ramsey Rule

The economic values of investing in long-term public projects are highly sensitive to the social discount rate (SDR). We surveyed over 200 experts to disentangle disagreement on the risk-free SDR into its component parts, including pure time preference, the wealth effect, and return to capital. We show that the majority of experts do not follow the simple Ramsey Rule, a widely used theoretical discounting framework, when recommending SDRs. Despite disagreement on discounting procedures and point values, we obtain a surprising degree of consensus among experts, with more than three-quarters finding the median risk-free SDR of 2 percent acceptable. (JEL C83, D61, D82, H43, Q58)

scholarly journals DISCOUNTING FOR PUBLIC POLICY: A SURVEY

2017 ◽  
Vol 33 (3) ◽  
pp. 391-439 ◽  
Author(s):  
Hilary Greaves
Keyword(s):  
Climate Change ◽  
Public Policy ◽  
Interest Rates ◽  
Discount Rate ◽  
Ethical Theory ◽  
Time Preference ◽  
Social Discount Rate ◽  
The Social ◽  
Positive Rate ◽  
Technical Details

Abstract:This article surveys the debate over the social discount rate. The focus is on the economics rather than the philosophy literature, but the survey emphasizes foundations in ethical theory rather than highly technical details. I begin by locating the standard approach to discounting within the overall landscape of ethical theory. The article then covers the Ramsey equation and its relationship to observed interest rates, arguments for and against a positive rate of pure time preference, the consumption elasticity of utility, and the effect of various sorts of uncertainty on the discount rate. Climate change is discussed as an application.

Discounting and intragenerational equity

2017 ◽  
Vol 23 (1) ◽  
pp. 19-36 ◽  
Author(s):  
Johannes Emmerling
Keyword(s):  
Discount Rate ◽  
Analytical Formula ◽  
The United States ◽  
The Other ◽  
Social Discount Rate ◽  
The Social ◽  
Intragenerational Equity ◽  
The One ◽  
Over Time ◽  
Ramsey Rule

AbstractWe study the social discount rate, taking into account inequality within generations, that is, across countries or individuals. We show that if inequality decreases over time, the social discount rate should be lower than the one obtained by the standard Ramsey rule under certain but reasonable conditions. Applied to the global discount rate and due to the projected convergence across countries, this implies that the inequality adjusted discount rate should be about twice as high as the standard Ramsey rule predicts. For individual countries on the other hand, where inequality tends to increase over time, the effect goes in the other direction. For the United States for instance, this inequality effect leads to a reduction of the social discount rate by about 0.5 to 1 percentage points. We also present an analytical formula for the social discount rate allowing us to disentangle inequality, risk, and intertemporal fluctuation aversion.

Book Reviews

2013 ◽  
Vol 51 (3) ◽  
pp. 894-897
Keyword(s):  
Term Structure ◽  
Discount Rate ◽  
Parametric Uncertainty ◽  
Fat Tails ◽  
Social Discount Rate ◽  
The Social ◽  
The University ◽  
Alternative Decision ◽  
Ramsey Rule

Explores recent advances in the field of the social discount rate and considers how society should value the future in this context. Discusses three ways to determine the discount rate; the Ramsey rule; extending the Ramsey rule to an uncertain economic growth; random walk and mean-reversion; Markov switches and extreme events; parametric uncertainty and fat tails; the Weitzman argument; a theory of the decreasing term structure of discount rates; inequalities; discounting nonmonetary benefits; alternative decision criteria; evaluation of risky projects; the option value of uncertain projects; and evaluation of nonmarginal projects. Gollier is Professor of Economics at the University of Toulouse and Director of the Toulouse School of Economics.

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