FEEM working papers "Note di lavoro" series
1999 .088

Time Horizon and the Discount Rate

Authors: Christian Gollier
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Discounting,uncertain growth,prudence,long term
JEL n.: D81,D91,Q25,Q28
JEL: Journal of Economic Theory
Date: 2002


We discuss the selection of the socially efficient discount rate for public investment projects that entail costs and benefits in the far distant future. We show that the discount rate should be a decreasing function of time horizon under some specific restrictions on the distribution of uncertain growth and on preferences. We consider a logarithmic random walk for consumption. The benchmark result is that, in the absence of any risk of recession, the yield curve is decreasing if relative risk aversion is decreasing. Relaxing the assumption on the absence of recession requires more restrictions on preferences, as increasing relative prudence.

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