Discounting in an Uncertain World -- Disentangling the Debate on the Weitzman-Gollier Puzzle
24 Pages Posted: 7 Oct 2014
Date Written: September 29, 2014
Abstract
Under conditions of risk it makes a difference whether the discount rate is determined as an expected present or as an expected future value. This difference which is dubbed as the Weitzman-Gollier puzzle has stimulated an intensive discussion which, however, is somewhat confusing. In this paper we try to provide some clarification by separating the different topics of the debate. In particular we give an intuitive explanation for the divergence between the outcomes of the present and the future value approach. Moreover, we show that a declining time patter of the discount rate which is the major implication of Weitzman’s present value approach can also be obtained in many other and more appealing ways.
Keywords: cost-benefit analysis, discounting, risk, Weitzman-Gollier Puzzle
JEL Classification: D61, D81, D99, G11
Suggested Citation: Suggested Citation