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Gamma discounters are short-termist

Author

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  • Gollier, Christian
Abstract
Weitzman (1998, 2001) proposed a simple “gamma discounting” method to characterize the term structure of discount rates today from the sole distribution of future spot interest rates. This rule which justifies using a smaller discount rate for longer maturities is now used for long-term policy evaluations in the UK, France, Norway, and potentially in the US. But we show that there is no social preference within the discounted expected utility framework that generically supports this pricing model and its underlying criterion, the expected net present value rule. Considering a standard Lucas tree economy, we characterize the term structure from a coherent joint distribution of future spot interest rates and future consumption levels. When future growth rates are positively serially correlated, efficient discount rates today are decreasing with maturity, and the gamma discounting rule yields discount rates that are larger than the efficient ones.

Suggested Citation

  • Gollier, Christian, 2014. "Gamma discounters are short-termist," IDEI Working Papers 828, Institut d'Économie Industrielle (IDEI), Toulouse, revised Oct 2014.
    • Handle: RePEc:ide:wpaper:28260
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    References listed on IDEAS

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    2. Rintaro Yamaguchi, 2019. "Intergenerational Discounting with Intragenerational Inequality in Consumption and the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 957-972, August.
    3. Freeman, Mark C. & Groom, Ben & Panopoulou, Ekaterini & Pantelidis, Theologos, 2015. "Declining discount rates and the Fisher Effect: Inflated past, discounted future?," Journal of Environmental Economics and Management, Elsevier, vol. 73(C), pages 32-49.
    4. Millner, Antony & Heal, Geoffrey, 2018. "Discounting by committee," Journal of Public Economics, Elsevier, vol. 167(C), pages 91-104.
    5. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent longterm social discount rate?," LSE Research Online Documents on Economics 67258, London School of Economics and Political Science, LSE Library.
    6. Rob Aalbers & Marjon Ruijter & Kees Oosterlee, 2014. "The social discount rate under a stochastic A2 scenario," CPB Discussion Paper 296, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Kathrin Goldmann, 2019. "Time-declining risk-adjusted social discount rates for transport infrastructure planning," Transportation, Springer, vol. 46(1), pages 17-34, February.
    8. Szekeres, Szabolcs, 2020. "The real solution of the Weitzman-Gollier Puzzle," MPRA Paper 102344, University Library of Munich, Germany.
    9. Szekeres, Szabolcs, 2020. "Correcting the Error in Gamma Discounting," MPRA Paper 102232, University Library of Munich, Germany, revised 27 Jul 2020.
    10. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    11. Millner, Antony & Healey, Andrew, 2018. "Discounting by committee," LSE Research Online Documents on Economics 90246, London School of Economics and Political Science, LSE Library.
    12. Antony Millner & Geoffrey Heal, 2015. "Collective intertemporal choice: time consistency vs. time invariance," GRI Working Papers 220, Grantham Research Institute on Climate Change and the Environment.

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    More about this item

    Keywords

    decreasing discount rates; term structure; uncertain growth; Weitzman-Gollier puzzle;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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