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Li and Pizer in the short-run: A comment on discounting

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  • Solow, Andrew R.
  • Farrow, Scott

Abstract

Li and Pizer derived upper and lower bounds on the time-dependent social discount rate that both converge in the long run to the consumption rate of interest. They went on to recommend using the consumption rate of interest as the social discount rate for investments relating to climate change for which the bulk of the benefits accrue in the far future. However, the bounds can be quite wide in the short-run, providing little guidance for shorter term discounting. Here, we show that if uncertainty in the social discount rate is encoded in a uniform distribution, then its expected value converges much more rapidly to the consumption rate of interest. The implications of this for project evaluation are more complicated than in the deterministic case considered by Li and Pizer.

Suggested Citation

  • Solow, Andrew R. & Farrow, Scott, 2024. "Li and Pizer in the short-run: A comment on discounting," Journal of Environmental Economics and Management, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:jeeman:v:127:y:2024:i:c:s009506962400113x
    DOI: 10.1016/j.jeem.2024.103039
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    References listed on IDEAS

    as
    1. Harberger, Arnold C. & Jenkins, Glenn P., 2015. "Musings on the Social Discount Rate 1," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 6(1), pages 6-32, April.
    2. Burgess, David F. & Zerbe, Richard O., 2013. "The most appropriate discount rate," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(3), pages 391-400, December.
    3. Moore Mark A. & Boardman Anthony E. & Vining Aidan R., 2013. "More appropriate discounting: the rate of social time preference and the value of the social discount rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(1), pages 1-16, March.
    4. Scott Farrow & W. Kip Viscusi, 2013. "Towards principles and standards for the benefit–cost analysis of safety," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 5, pages 172-193, Edward Elgar Publishing.
    5. Burgess David F. & Zerbe Richard O., 2013. "The most appropriate discount rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(3), pages 391-400, December.
    6. Li, Qingran & Pizer, William A., 2021. "Use of the consumption discount rate for public policy over the distant future," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    7. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Social discount rate; Consumption rate; Benefit-cost; Convergence;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • H4 - Public Economics - - Publicly Provided Goods
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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