Time Horizon and the Discount Rate

Time Horizon and the Discount Rate

We consider an economy à la Lucas (1978, Econometrica 46, 1429–1446) with a risk-averse representative agent. The exogenous growth rate of the economy follows a random walk. We characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate. The benchmark result is that, when the growth rate is almost surely nonnegative, the yield curve is...

The Social Discount Rate

What discount rate should be applied to social investments? It is standard to use the market interest rate, thereby respecting private preferences. We show that application of this “revealed preference” criterion rests on faith, not logic. It is justified only if preferences over all choices, including past choices, are time invariant. The conditions for this to be true are stringent. Under mor...

The Long-Term Discount Rate∗

We develop an expression for the long-term discount rate in an economy in which a representative consumer has access to both a risk-free and a risky production technology. Even when the risk-free sector is very small, and with probability one becomes a negligible fraction of the economy in the long run, interest rates are determined differently than in a single-sector economy. As in a single-ri...

Energy Policy and the Social Discount Rate

Recent debates over the economics of climate change underscore the importance of what at first blush is a narrow technical issue in welfare economics and cost-benefit analysis (CBA). Yet even before the need to study the economics of climate change, debate over both nuclear energy policy and water resource policy highlighted the fateful role that social discount rates play in policy prescriptio...

Markov decision processes with time-varying discount factors and random horizon