How Should Benefits and Costs Be Discounted in an Intergenerational Context? The Views of an Expert Panel

Resources for the Future Discussion Paper No. 12-53

34 Pages Posted: 12 Jan 2013

See all articles by Kenneth J. Arrow

Kenneth J. Arrow

Stanford University - Department of Economics

Maureen Cropper

University of Maryland - Department of Economics; Resources for the Future

Christian Gollier

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

Ben Groom

University of Oxford - Department of Economics

Geoffrey M. Heal

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Richard G. Newell

Duke University - Nicholas School of Environment; National Bureau of Economic Research (NBER); Resources for the Future

William D. Nordhaus

Yale University - Department of Economics; Cowles Foundation, Yale University; National Bureau of Economic Research (NBER)

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

William A. Pizer

Duke University

Paul Portney

University of Arizona - Eller College of Management

Thomas Sterner

Göteborg University - Department of Economics

Richard S. J. Tol

The Economic and Social Research Institute, Dublin; Institute for Environmental Studies, Free University Amsterdam

Martin Weitzman

Harvard University - Department of Economics

Date Written: December 19, 2013

Abstract

In September 2011, the US Environmental Protection Agency asked 12 economists how the benefits and costs of regulations should be discounted for projects that affect future generations. This paper summarizes the views of the panel on three topics: the use of the Ramsey formula as an organizing principle for determining discount rates over long horizons, whether the discount rate should decline over time, and how intra- and intergenerational discounting practices can be made compatible. The panel members agree that the Ramsey formula provides a useful framework for thinking about intergenerational discounting. We also agree that theory provides compelling arguments for a declining certainty-equivalent discount rate. In the Ramsey formula, uncertainty about the future rate of growth in per capita consumption can lead to a declining consumption rate of discount, assuming that shocks to consumption are positively correlated. This uncertainty in future consumption growth rates may be estimated econometrically based on historic observations, or it can be derived from subjective uncertainty about the mean rate of growth in mean consumption or its volatility. Determining the remaining parameters of the Ramsey formula is, however, challenging.

Keywords: discount rate, uncertainty, declining discount rate, benefit-cost analysis

JEL Classification: D61

Suggested Citation

Arrow, Kenneth J. and Cropper, Maureen L. and Gollier, Christian and Groom, Ben and Heal, Geoffrey M. and Newell, Richard G. and Nordhaus, William D. and Pindyck, Robert S. and Pizer, William A. and Portney, Paul R. and Sterner, Thomas and Tol, Richard S. J. and Weitzman, Martin L., How Should Benefits and Costs Be Discounted in an Intergenerational Context? The Views of an Expert Panel (December 19, 2013). Resources for the Future Discussion Paper No. 12-53. Available at SSRN: https://ssrn.com/abstract=2199511 or http://dx.doi.org/10.2139/ssrn.2199511

Kenneth J. Arrow

Stanford University - Department of Economics ( email )

Landau Economics Building
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Maureen L. Cropper (Contact Author)

University of Maryland - Department of Economics

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Resources for the Future ( email )

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Christian Gollier

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

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

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Ben Groom

University of Oxford - Department of Economics ( email )

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Geoffrey M. Heal

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://www.gsb.columbia.edu/faculty/gheal/

National Bureau of Economic Research (NBER)

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Richard G. Newell

Duke University - Nicholas School of Environment ( email )

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United States
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National Bureau of Economic Research (NBER) ( email )

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Resources for the Future ( email )

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William D. Nordhaus

Yale University - Department of Economics ( email )

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New Haven, CT 06520-8268
United States
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203-432-5779 (Fax)

Cowles Foundation, Yale University ( email )

Box 208281
New Haven, CT 06520-8281
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02139
United States
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617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/rpindyck/www/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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William A. Pizer

Duke University ( email )

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Durham, NC 27708-0204
United States

Paul R. Portney

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Thomas Sterner

Göteborg University - Department of Economics ( email )

Göteborg
Sweden

Richard S. J. Tol

The Economic and Social Research Institute, Dublin ( email )

Whitaker Square
Sir John Rogerson's Quay
Dublin 2
United States

HOME PAGE: http://www.esri.ie

Institute for Environmental Studies, Free University Amsterdam ( email )

De Boelelaan 1115
Amsterdam, 1081 HV
Netherlands

Martin L. Weitzman

Harvard University - Department of Economics ( email )

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

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