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Gamma Discounting

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  • Martin L. Weitzman

Abstract

A critical problem, which has long plagued cost-benefit analysis, concerns the appropriate interest rate to use for discounting the future. This paper proposes a new approach to resolving the dilemma of the unknown discount rate, by incorporating the uncertainty directly into the analysis. An operational methodology is developed to determine the time-dependent schedule of effective interest rates appropriate for discounting long-term environmental projects or activities, like mitigating the effects of global warming. A numerical example is constructed from the results of a survey based on the opinions of 1,720 economists. Implications and ramifications of the proposed "gamma-discounting" approach are discussed.

Suggested Citation

  • Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
    • Handle: RePEc:fth:harver:1843
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    References listed on IDEAS

    as
    1. Cropper, Maureen & Laibson, David, 1998. "The implications of hyperbolic discounting for project evaluation," Policy Research Working Paper Series 1943, The World Bank.
    2. 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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    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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