Journal Article

No. 2009-25 | June 09, 2009
Should We Discount the Far-Distant Future at Its Lowest Possible Rate? PDF Icon

Abstract

In this paper, we elaborate on an idea initially developed by Weitzman (1998) that justifies taking the lowest possible discount rate for far-distant future cash flows. His argument relies on the arbitrary assumption that when the future rate of return of capital (RRC) is uncertain, one should invest in any project with a positive expected net present value. We examine an economy with a risk-averse representative agent facing an uncertain evolution of the RRC. In this context, we characterize the socially efficient stochastic consumption path, which allows us in turn to use the Ramsey rule to characterize the term structure of socially efficient discount rates. We show that Weitzman’s claim is qualitatively correct if shocks on the RRC are persistent. On the contrary, in the absence of any serial correlation in the RRC, the term structure of discount rates should be flat.

JEL Classification

E43 G12 Q51

Citation

Christian Gollier (2009). Should We Discount the Far-Distant Future at Its Lowest Possible Rate?. Economics: The Open-Access, Open-Assessment E-Journal, 3 (2009-25): 1—14. http://dx.doi.org/10.5018/economics-ejournal.ja.2009-25

Assessment

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Citations (@RePEc): 13
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Comments and Questions


Editorial Office - Response
September 22, 2009 - 12:50

A detailed response on this article has been published by Mark C. Freeman "Yes, We Should Discount the Far-Distant Future at Its Lowest Possible Rate: A Resolution of the Weitzman-Gollier Puzzle".

See http://www.economics-ejournal.org/economics/journalarticles/2010-13/ or the attached file


Szabolcs Szekeres - A subtle error with serious consequences
November 19, 2013 - 22:39

Gollier writes in this article that "using the ENFV and ENPV approaches yield opposite results, except in the special case of certainty." It turns out, however, that Weitzman's very plausible looking expected discount factor formulation, on which this assertion is based, is wrong, and when it is corrected, the ENFV ...[more]

... and ENPV approaches always lead to identical conclusions, even in the case of uncertain interest rates. The nature of the error and the interpretation of the true meaning of Weitzman's formula are described in http://www.open-science-repository.com/economics-23050448.html