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Discounting, Uncertainty, and Revealed Time Preference

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  • Richard B. Howarth

Abstract

Recent studies suggest that direct preferences regarding investment gains and losses may significantly affect people’s behavior in financial markets. The present paper shows that this hypothesis has striking implications for the choice of discount rates in cost-benefit analysis. The paper explores a model in which the future benefits provided by a generic public good—environmental quality—should be discounted at a rate that is close to the market rate of return for risk-free financial assets. This holds true even when the public good has risk characteristics equivalent to those of risky forms of wealth such as corporate stocks.

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  • Richard B. Howarth, 2009. "Discounting, Uncertainty, and Revealed Time Preference," Land Economics, University of Wisconsin Press, vol. 85(1), pages 24-40.
    • Handle: RePEc:uwp:landec:v:85:y:2009:i:1:p:24-40
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    3. Johansson-Stenman, Olof & Sterner, Thomas, 2015. "Discounting and relative consumption," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 19-33.
    4. Xu, Ying & Kovacs, Kent & Nalley, Lanier & Popp, Michael, 2015. "Investment in on-farm reservoirs to align economic returns and ecosystem services," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196778, Southern Agricultural Economics Association.
    5. Kovacs, Kent F. & Haight, Robert G. & McCullough, Deborah G. & Mercader, Rodrigo J. & Siegert, Nathan W. & Liebhold, Andrew M., 2010. "Cost of potential emerald ash borer damage in U.S. communities, 2009-2019," Ecological Economics, Elsevier, vol. 69(3), pages 569-578, January.
    6. Hahn, W. Andreas & Härtl, Fabian & Irland, Lloyd C. & Kohler, Christoph & Moshammer, Ralf & Knoke, Thomas, 2014. "Financially optimized management planning under risk aversion results in even-flow sustained timber yield," Forest Policy and Economics, Elsevier, vol. 42(C), pages 30-41.
    7. Kovacs, Kent F. & Haight, Robert G. & Jung, Suhyun & Locke, Dexter H. & O'Neil-Dunne, Jarlath, 2013. "The marginal cost of carbon abatement from planting street trees in New York City," Ecological Economics, Elsevier, vol. 95(C), pages 1-10.
    8. Jin, Jianjun & Wan, Xinyu & Lin, Yongsheng & Kuang, Foyuan & Ning, Jing, 2019. "Public willingness to pay for the research and development of solar energy in Beijing, China," Energy Policy, Elsevier, vol. 134(C).
    9. Kovacs, Kent F. & Polasky, Stephen & Keeler, Bonnie & Pennington, Derric & Nelson, Erik & Plantinga, Andrew J. & Taff, Steven J., 2012. "Evaluating the Return in Ecosystem Services from Investment in Public Land Acquisitions," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124660, Agricultural and Applied Economics Association.
    10. Auke Hoekstra & Maarten Steinbuch & Geert Verbong, 2017. "Creating Agent-Based Energy Transition Management Models That Can Uncover Profitable Pathways to Climate Change Mitigation," Complexity, Hindawi, vol. 2017, pages 1-23, December.
    11. Kovacs, Kent F. & Haight, Robert G. & Mercader, Rodrigo J. & McCullough, Deborah G., 2014. "A bioeconomic analysis of an emerald ash borer invasion of an urban forest with multiple jurisdictions," Resource and Energy Economics, Elsevier, vol. 36(1), pages 270-289.
    12. Gerst, Michael D. & Howarth, Richard B. & Borsuk, Mark E., 2010. "Accounting for the risk of extreme outcomes in an integrated assessment of climate change," Energy Policy, Elsevier, vol. 38(8), pages 4540-4548, August.

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    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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