Should We Discount the Far-Distant Future at its Lowest Possible Rate?

17 Pages Posted: 18 Dec 2010

See all articles by Christian Gollier

Christian Gollier

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

In this paper, we elaborate on an idea initially developed by Weitzman (1998) that justifies taking the lowest possible discount rate for far-distant future cash flows. His argument relies on the arbitrary assumption that when the future rate of return of capital (RRC) is uncertain, one should invest in any project with a positive expected net present value. We examine an economy with a risk-averse representative agent facing an uncertain evolution of the RRC. In this context, we characterize the socially efficient stochastic consumption path, which allows us in turn to use the Ramsey rule to characterize the term structure of socially efficient discount rates. We show that Weitzman's claim is qualitatively correct if shocks on the RRC are persistent. On the contrary, in the absence of any serial correlation in the RRC, the term structure of discount rates should be flat.

Keywords: Discount rate, term structure, certainty equivalent rate, Ramsey rule, sustainable development

JEL Classification: E43, Q51, G12

Suggested Citation

Gollier, Christian, Should We Discount the Far-Distant Future at its Lowest Possible Rate? (2009). Economics Discussion Paper No. 2009-7. Available at SSRN: https://ssrn.com/abstract=1726762 or http://dx.doi.org/10.2139/ssrn.1726762

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)
+33 61 12 86 37 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

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