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Generation adjusted discounting in long-term decision-making

Author

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  • Bayer, Stefan

Abstract

This paper analyses the choice of an inter-generational discount rate as well as a method for inter-generational discounting. It is shown that the pure time preference rate is irrelevant for inter-generational comparisons. However, the application of the growth time preference rate - with respect to consumption - is a necessary condition for inter-temporal utility maximisation. Opportunity costs should be taken into account not by discounting with their internal rate of return, but by calculating consumption equivalents (shadow prices of capital). Thus, an intergenerational discount rate has to be based on the time preference approach. These considerations lead us to the formulation of a new discounting technique, Generation Adjusted Discounting (GAD). It takes into account intra- as well as inter-generational aspects. Compared with conventional discounting techniques, we find that the present values obtained by using the GAD noticeably exceed those derived conventionally.

Suggested Citation

  • Bayer, Stefan, 2000. "Generation adjusted discounting in long-term decision-making," Tübinger Diskussionsbeiträge 187, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:187
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    Cited by:

    1. Koepke, Nikola & Baten, Joerg, 2005. "The biological standard of living in Europe during the last two millennia," European Review of Economic History, Cambridge University Press, vol. 9(1), pages 61-95, April.
    2. Baten, Jörg & Wallusch, Jacek, 2003. "Market integration and disintegration of Poland and Gemany [Germany] in the 18th century," Tübinger Diskussionsbeiträge 268, University of Tübingen, School of Business and Economics.

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