Discount Rates, Social Judgments, Individuals’ Risk Preferences, and Uncertainty

23 Pages Posted: 30 Jul 2011

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

David A. Weisbach

University of Chicago - Law School; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Date Written: January 5, 2011

Abstract

The choice of the proper discount rate is important in the analysis of projects whose costs and benefits extend into the future, a particularly striking feature of policies directed at climate change. Much of the literature, including prominent work by Arrow et al. (1996), Stern (2007, 2008), and Dasgupta (2008), employs a reduced-form approach that conflates social value judgments and individuals’ risk preferences, the latter raising an empirical question about choices under uncertainty rather than a matter for ethical reflection. This article offers a simple, explicit decomposition that clarifies the distinction, reveals unappreciated difficulties with the reduced-form approach, and relates them to the literature. In addition, it explores how significant uncertainty about future consumption, another central factor in climate policy assessment, raises further complications regarding the relationship between social judgments and individuals’ risk preferences.

Keywords: Discount Rate, Risk Preferences, Policy Assessment Under Uncertainty, Climate Policy

JEL Classification: D63, D81, H43, Q54, Q58

Suggested Citation

Kaplow, Louis and Weisbach, David, Discount Rates, Social Judgments, Individuals’ Risk Preferences, and Uncertainty (January 5, 2011). Journal of Risk and Uncertainty, Vol. 42, pp. 125-143, 2011; U of Chicago Law & Economics, Olin Working Paper No. 564. Available at SSRN: https://ssrn.com/abstract=1895643

Louis Kaplow

Harvard Law School ( email )

1575 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-4101 (Phone)
617-496-4880 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/facdir.php?id=32&show=bibliography

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Weisbach (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-3342 (Phone)
773-702-0730 (Fax)

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

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