Maximizing the expected net future value as an alternative strategy to gamma discounting

Abstract

We examine the problem of selecting the discount rate for far distant cash-flows when there is much uncertainty about what will be the future investment opportunities in the economy. We show that it is efficient to take a discount rate that is increasing with the time horizon, and that this rate should tend to the largest possible rate as the horizon tends to infinity. These recommendations are opposite to the ones proposed by Weitzman (2001) in this journal. * This paper has benefitted from intense discussions with François Salanié and Richard Zeckhauser.

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

“…16 Our focus on the co-integrating relationship between nominal interest rates and inflation means that we are not interested in modeling the real interest rate directly, and hence we do not follow the procedures associated with previous models of the certainty equivalent discount rate found in GKPP. 17 For expository purposes, we drop m.…”

Yes, We Should Discount the Far-Distant Future at Its Lowest Possible Rate: A Resolution of the Weitzman–Gollier Puzzle

“…As a consequence, it is the Weitzman ENPV that is the correct evaluation criterion and not the Gollier ENFV criterion. This contrasts with Gollier (2004): "Clearly, Weitzman and I cannot be both right. In fact, to tell the truth, I believe that we are both wrong" (p.88), Hepburn and Groom (2007): "Our conclusion, perhaps surprisingly, is that Weitzman and Gollier are both right" (p.107), Gollier (2009a): "This demonstrates that, as suggested by Hepburn and Groom (2007), both Weitzman (1998) and Gollier (2004) are right" (p.6), Gollier (2009b): "In a sense, contrary to our conclusion in Gollier (2004), both Weitzman (1998) and Gollier (2004) are right..." (p.8) and Buchholz and Schumacher (2009): "Much more is in favor of Gollier's approach because he puts the risk to the right place, i.e.…”

“…As Gollier (2004) explains, (2) and (4) can be interpreted as exercises in exponential utility. r d (T ) is the certainty equivalent of e r when a pseudo-investor has a constant coefficient of absolute risk aversion T .…”

“…Therefore, the social planner should accept this initiative. However, from Gollier (2004), if she uses the ENFV criterion, a project is accepted if and only if D T pe r c (T )T > 0. In this case, according to the ENFV criterion:…”

“…As a response to this, Gollier (2004) has extended a paradox that can be traced back to Pazner and Razin (1975). He proves that the recommendation that low discount rates should be applied at far horizons is highly sensitive to the chosen investment appraisal technique.…”