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

15 Pages Posted: 5 Apr 2007 Last revised: 20 Feb 2008

Ralph Winkler

University of Bern - Department of Economics; University of Bern - Oeschger Centre for Climate Change Research

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

Suggested Citation

Winkler, Ralph, Does 'Better' Discounting Lead to 'Worse' Outcomes in Long-Run Decisions? The Dilemma of Hyperbolic Discounting. Ecological Economics, Vol. 57, No. 4, pp. 573-582, 2006. Available at SSRN: https://ssrn.com/abstract=978438

Ralph Winkler (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, 3001
Switzerland
+41 31 631 4508 (Phone)

HOME PAGE: http://www.ralph-winkler.de

University of Bern - Oeschger Centre for Climate Change Research ( email )

Zähringerstrasse 25
Bern, 3012
Switzerland

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