Gamma Discounting

Martin L. Weitzman

Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: A critical problem, which has long plagued cost-benefit analysis, concerns the appropriate interest rate to use for discounting the future. This paper proposes a new approach to resolving the dilemma of the unknown discount rate, by incorporating the uncertainty directly into the analysis. An operational methodology is developed to determine the time-dependent schedule of effective interest rates appropriate for discounting long-term environmental projects or activities, like mitigating the effects of global warming. A numerical example is constructed from the results of a survey based on the opinions of 1,720 economists. Implications and ramifications of the proposed "gamma-discounting" approach are discussed.

Date: 1998
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Persistent link: http://EconPapers.repec.org/RePEc:fth:harver:1843

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