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Correcting the Error in Gamma Discounting

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  • Szekeres, Szabolcs

Abstract

In “Gamma Discounting” Martin L. Weitzman (2001) concludes that certainty equivalent discount rates should decline significantly over time. He draws this conclusion from fitting a Gamma distribution to the responses of 2,160 economists asked to give a discount rate estimate and calculating effective discount rates from it. This paper shows that Weitzman’s model is based on an erroneous definition of expected present value. Correcting the definition changes Weitzman’s conclusions, explains the Pazner and Razin discrepancy and solves the Weitzman-Gollier puzzle under risk neutrality. The assertions of this paper are corroborated by calculations based on data found in Weitzman (2001).

Suggested Citation

  • Szekeres, Szabolcs, 2020. "Correcting the Error in Gamma Discounting," MPRA Paper 102232, University Library of Munich, Germany, revised 27 Jul 2020.
    • Handle: RePEc:pra:mprapa:102232
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    References listed on IDEAS

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    1. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, vol. 1(2), pages 85-89, June.
    2. Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, vol. 107(3), pages 350-353, June.
    3. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    4. Ben Groom & Cameron Hepburn, 2017. "Reflections—Looking Back at Social Discounting Policy: The Influence of Papers, Presentations, Political Preconditions, and Personalities," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(2), pages 336-356.
    5. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    6. Ben Groom & Cameron Hepburn & Phoebe Koundouri & David Pearce, 2005. "Declining Discount Rates: The Long and the Short of it," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(4), pages 445-493, December.
    7. Pazner, Elisha A & Razin, Assaf, 1975. "On Expected Value vs. Expected Future Value," Journal of Finance, American Finance Association, vol. 30(3), pages 875-877, June.
    8. 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.
    9. Szekeres, Szabolcs, 2018. "Why expected discount factors yield incorrect expected present values," MPRA Paper 91187, University Library of Munich, Germany, revised 02 Jan 2019.
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    Cited by:

    1. Szekeres, Szabolcs, 2023. "The simple answer to the Social Discount Rate question," MPRA Paper 117843, University Library of Munich, Germany.
    2. Szekeres, Szabolcs, 2024. "Resolving the Discounting Dilemma," MPRA Paper 120014, University Library of Munich, Germany.

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    More about this item

    Keywords

    Weitzman-Gollier puzzle; declining discount rates; discounting;
    All these keywords.

    JEL classification:

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

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