How Should the Distant Future Be Discounted When Discount Rates are Uncertain?

16 Pages Posted: 8 Dec 2009

See all articles by Christian Gollier

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Martin Weitzman

Harvard University - Department of Economics

Date Written: December 2009

Abstract

It is not immediately clear how to discount distant-future events, like climate change, when the distant-future discount rate itself is uncertain. The so-called “Weitzman-Gollier puzzle” is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results with the opposite policy implications. We explain how the “Weitzman-Gollier puzzle” is resolved. When agents optimize their consumption plans and probabilities are adjusted for risk, the two approaches are identical. What we would wish a reader to take away from this paper is the bottom-line message that the appropriate long run discount rate declines over time toward its lowest possible value.

Keywords: discount rate, term structure, climate change, cost-benefit analysis

JEL Classification: G12, E43, Q51

Suggested Citation

Gollier, Christian and Weitzman, Martin L., How Should the Distant Future Be Discounted When Discount Rates are Uncertain? (December 2009). CESifo Working Paper Series No. 2863. Available at SSRN: https://ssrn.com/abstract=1519805

Christian Gollier (Contact Author)

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
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Toulouse Cedex, F-31000
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+33 61 12 86 30 (Phone)
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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

Martin L. Weitzman

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-5133 (Phone)

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