Does 'Better' Discounting Lead to 'Worse' Outcomes in Long-Run Decisions? The Dilemma of Hyperbolic Discounting

Abstract

The shortcomings of conventional discounting, especially in the context of long-run environmental problems, have been extensively discussed in the literature. Recently, hyperbolic discounting, i.e. discounting at declining instead of constant discount rates, has attracted a lot of interest among both scientists and politicians. Although there are compelling arguments for employing hyperbolic discounting, there are also pitfalls, which have to be pointed out. In this paper I show that the problem of time-inconsistency, an inherent characteristics of hyperbolic discounting, leads to a potential clash between economic efficiency and intergenerational equity. As an example, I refer to the weak progress in the controlling of greenhouse gas emissions under the Kyoto protocol. As the problem of time-inconsistency cannot be solved on economic grounds alone, there is a need for an intergenerational moral commitment.

Keywords: Hyperbolic discounting, Intergenerational equity, Project evaluation, Time inconsistency

JEL Classification: H43, Q51, C61