Skip to main content
Article thumbnail
Location of Repository

Gamma discounting and expected net future value

By Cameron Hepburn and Ben Groom

Abstract

Recent research suggests that the long term future should be discounted with a declining discount rate. One such line of research, exemplified by Weitzman [Gamma discounting, Amer. Econ. Rev. 91 (2001) 261–271], shows that the certainty equivalent discount rate is declining when future capital productivity is uncertain. However, in a recent paper Gollier [Maximising the expected net future value as an alternative strategy to gamma discounting, Finan. Res. Lett. 1 (2004) 85–89] puts forward a puzzle that casts doubt on the validity of this conclusion. He asserts that using expected net future value, rather than conventional expected net present value, implies that the certainty equivalent discount rate increases over time. This paper resolves the apparent puzzle by encompassing the models of Gollier [Maximising the expected net future value as an alternative strategy to gamma discounting, Finan. Res. Lett. 1 (2004) 85–89] and Weitzman [Gamma discounting, Amer. Econ. Rev. 91 (2001) 261–271]. In fact, Gollier proves that as the evaluation date moves further into the future, the discount rate at a given point in time will increase. However, given a particular evaluation date, the schedule of discount rates is declining

Topics: HB Economic Theory
Publisher: Elsevier
Year: 2007
DOI identifier: 10.1016/j.jeem.2006.03.005
OAI identifier: oai:eprints.lse.ac.uk:32943
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://www.elsevier.com/wps/fi... (external link)
  • http://eprints.lse.ac.uk/32943... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.