Discounting and Confidence

The paper analyzes the social discount rate under uncertainty. It employs a preference representation that enriches the characterization of uncertainty by a degree of confidence into probabilistic descriptions of the world. Special cases of the model comprise discounting under smooth ambiguity aversion as well as discounting under a disentanglement of risk aversion and aversion to intertemporal substitution. I relate different results in the literature switching risk measures between the classical Arrow Pratt form and a measure of intertemporal risk aversion. I characterize the general class of preferences for which uncertainty implies a reduction of the social discount rate. I also characterize the class of preferences that lower the discount rate compared to the standard model. I derive a particular parametric discounting formula under the assumptions of isoelastic preferences and normal growth rates. Apart from the usual characteristics of the growth process like expected value and variance, the discount rate depends on a measure of confidence into future growth estimates and a measure of aversion to the lack of confidence. JEL Codes: D61, Q54, D81, D90