Gamma Discounting

By incorporating the probability distribution directly into the analysis, this paper proposes a new theoretical approach to resolving the perennial dilemma of being uncertain about what discount rate to use in cost-benefit analysis. A numerical example is constructed from the results of a survey bas...

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Bibliographic Details
Published in:The American economic review 2001-03, Vol.91 (1), p.260-271
Main Author: Weitzman, Martin L.
Format: Article
Language:English
Subjects:
Bank rates
Climate change
Cost benefit analysis
Discount rates
Discounting
Distribution
Economic costs and benefits
Economic models
Economic surveys
Economic theory
Economic value
Economists
Energy economics
Environmental policy
Global warming
Histograms
International economics
Mathematical economics
Methods
Polls & surveys
Probability
Probability distributions
Project evaluation
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Summary:By incorporating the probability distribution directly into the analysis, this paper proposes a new theoretical approach to resolving the perennial dilemma of being uncertain about what discount rate to use in cost-benefit analysis. A numerical example is constructed from the results of a survey based on the opinions of 2,160 economists. The main finding is that even if every individual believes in a constant discount rate, the wide spread of opinion on what it should be makes the effective social discount rate decline significantly over time. Implications and ramifications of this proposed "gamma-discounting" approach are discussed.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.91.1.260