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Gamma discounting and expected net future value

Hepburn, Cameron and Groom, Ben (2007) Gamma discounting and expected net future value. Journal of Environmental Economics and Management, 53 (1). pp. 99-109. ISSN 0095-0696

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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 [Gamma discounting, Amer. Econ. Rev. 91 (2001) 261–271], shows that the certainty equivalent discount rate is declining when future capital productivity is uncertain. However, in a recent paper Gollier [Maximising the expected net future value as an alternative strategy to gamma discounting, Finan. Res. Lett. 1 (2004) 85–89] 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 [Maximising the expected net future value as an alternative strategy to gamma discounting, Finan. Res. Lett. 1 (2004) 85–89] and Weitzman [Gamma discounting, Amer. Econ. Rev. 91 (2001) 261–271]. 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.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/journaldescriptio...
Additional Information: © 2006 Elsevier Inc.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 01 Mar 2011 12:53
URL: http://eprints.lse.ac.uk/32943/

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