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Discussion Paper

No. 2009-42 | September 22, 2009
Yes, We Should Discount the Far-Distant Future at Its Lowest Possible Rate: A Resolution of the Weitzman–Gollier Puzzle

Abstract

In this paper the author proves that the Expected Net Future Value (ENFV) criterion can lead a risk neutral social planner to reject projects that increase expected utility. By contrast, the Expected Net Present Value (ENPV) rule correctly identifies the economic value of the project. While the ENFV increases with uncertainty over future interest rates, the expected utility decreases because of the planner's desire to smooth consumption across time. This paper therefore shows that Weitzman (1998) is "right" and that, within his economy, the far-distant future should be discounted at its lowest possible rate.

JEL Classification

D61 E43 G12 G31 Q51

Cite As

Mark C. Freeman (2009). Yes, We Should Discount the Far-Distant Future at Its Lowest Possible Rate: A Resolution of the Weitzman–Gollier Puzzle. Economics Discussion Papers, No 2009-42, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2009-42

Assessment



Comments and Questions


Anonymous - Referee Report 1
October 13, 2009 - 13:41

See attached file


Anonymous - Referee Report 2
October 14, 2009 - 08:23

See attached file


Mark Freeman - Response to Referees 1 & 2
October 29, 2009 - 11:15

I thank Referees 1 and 2 very much for their thoughtful and constructive comments and enclose my response to their reports.


Anonymous - Invited Reader Comment
November 05, 2009 - 09:18

The paper has some potential to produce a contribution to the debate on how to discount that long-run future, but it is written in a very unfocused and confusing fashion. The aims of the author are: (1) to describe the paradox between Weitzman’s (referred to as ENPV criterion) and Gollier’s ...[more]

... (referred to as ENFV criterion) approaches to discounting the distant future; (2) to resolve the inconsistency between the two approaches; (3) to demonstrate why the ENPV method is correct and the ENFV method cannot be used to evaluate projects when interest-rates are stochastic.

My assessment of the paper is the following:
- Point (1) has been done repeatedly in the relevant literature.
- Point (2) has been resolved by Gollier in a series of recent papers.
- Point (3) is demonstrated outside the Gollier or Weitzman framework, using the Jacquier et al. (2003, 2005), so the comparison with Gollier’s and Weitzman’s result is not immediate.

Given the above, I find points (1) and (2), not interesting and I suggest the author tries to re-written in a more clear and focused fashion his arguments re. point (3) and try to do so using the Gollier framework that can accommodate Weitzman’s result (see, Gollier et al. (2009) Economic Policy paper).


Mark Freeman - Reply to Invited Reader 1
November 06, 2009 - 09:39

Many thanks for your comments - kindly find enclosed by reply. Mark.


Anonymous - Referee Report 3
January 05, 2010 - 14:27

See attached file


Mark Freeman - Response to Referee 3
January 10, 2010 - 10:01

Many thanks for your comments. Kindly find enclosed my reply.