Risk-Adjusted Gamma Discounting

By Martin Weitzman. 2010

127 citations recorded by the source corpus.

It is widely recognized that the economics of distant-future events, like climate change, is critically dependent upon the choice of a discount rate. Unfortunately, it is unclear how to discount distant-future events when the future discount rate itself is unknown. In previous work, an analytically-tractable approach called "gamma discounting" was proposed, which gave a declining discount rate schedule as a simple closed-form function of time. This paper extends the previous gamma approach by using a Ramsey optimal growth model, combined with uncertainty about future productivity, in order to "risk adjust" all probabilities by marginal utility weights. Some basic numerical examples are given, which suggest that the overall effect of risk-adjusted gamma discounting on lowering distant-future discount rates may be significant. The driving force is a "fear factor" from risk aversion to permanent productivity shocks representing catastrophic future states of the world.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/0e30c5d662bc30bb51373c8ca13db14566ff8acc

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Citations in the corpus

The Long-Run Discount Rate Controversy (2014, background): “In a series of papers (Gollier 2009, 2010), Weitzman (2010), Gollier and Weitzman 2010), Gollier and Weitzman converged to the conclusion that both risk aversion and the optimization of the allocation of the net benefits through time must be introduced into the picture to solve the puzzle.”
Climate policy modeling: An online SCI-E and SSCI based literature review (2015, unknown): “5% 6% → Minimum 5% → Minimum Reference [72] [63] [6] [73] [71] [74] [75] Note: This figure is adapted from [19, 76].”