A Note on Discounting an Increasingly Uncertain Future

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Abstract

This note clarifies the roles played by the wealth and precautionary effects in determining the socially efficient discount rate for public investment projects and how the rate should vary over time. We first give a general characterization of the effects of stochastic shifts in the consumption growth rate on the magnitude of the socially efficient discount rate. We then show that increasing uncertainty in the consumption growth rate provides a natural and compelling rationale for discounting more distant future consumption at a lower rate.

Bibliographical metadata

Original languageEnglish
Pages (from-to)981-993
Number of pages12
JournalJournal of Public Economic Theory
Volume16
Issue number6
DOIs
Publication statusPublished - 1 Dec 2014