consumer response to the timing of income evidence from a change in tax withholding in 1992 the income tax withholding tables were adjusted so that withholding was reduced a typical worker received an extra 28 80 in take home pay per month in march through december 1992 to be offset by a lower tax refund in 1993 the change in withholding amounted to 0 5 percent of gdp president bush who proposed this change in his state of the union address intended that it provide a temporary stimulus to demand but the policy change involved only the timing of income so under the life cycle permanent income model it would be predicted to have a negligible effect on consumption and aggregate demand this paper reports consumers responses to the change in withholding the results are based on a survey taken shortly after it went into effect forty three percent of consumers report spending the extra take home pay substantially more than the zero percent predicted by the standard models but substantially less than the one hundred percent upon which the policy was predicated the decision to save the income is not explained by expected income growth therefore while behavior of many households is not fully consistent with the life cycle permanent income model liquidity constraints do not appear to account for this behavior this abstract was borrowed from another version of this item

survey measures of expected u s inflation of real interest rates and cash flows for decisions concerning investment expenditures international capital flows and exchange rate movements hinge in large part on expected real yield differentials across countries the federal reserve needs reliable measures of expected inflation to formulate and gauge the thrust of monetary policy in fact inflation expectations have become more important to the fed given the diminished stability of the link between the monetary aggregates and gdp expenditures since the early 1980s and the greater role which has been thrust upon expected real short term interest rates in the implementation of federal reserve policy the issue of rationality of inflation expectations that is the extent to which agents form expectations without making systematic mistakes in their beliefs about what inflation will be is important if inflation expectations are formed rationally labor and financial markets will strongly tend to neutralize the potential redistributive effects of inflation over time financial capital will flow efficiently within and across national borders moreover some of the stronger claims of new classical macroeconomics like the claim that only unexpected monetary policy actions will

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

reconciling sustainability systems theory and discounting abstract most definitions of sustainability imply that a system is to be maintained at a certain level held within certain limits into the indefinite future sustainability denies run away growth but it also avoids any decline or destruction this sustainability path is hard to reconcile with the renewal cycle that can be observed in many natural systems developing according to their intrinsic mechanisms and in social systems responding to internal and external pressures systems are parts of hierarchies where systems of higher levels are made up of subsystems from lower levels renewal in components is an important factor of adaptation and evolution if a system is sustained for too long it borrows from the sustainability of a supersystem and rests upon lack of sustainability in subsystems therefore by sustaining certain systems beyond their renewal cycle we decrease the sustainability of larger higher level systems for example schumpeter s theory of creative destruction posits that in a capitalist economy the collapse and renewal of firms and industries is necessary to sustain the vitality of the larger economic system however if the capitalist economic system relies on endless growth then sustaining it for too long will inevitably borrow from the sustainability of the global ecosystem this could prove catastrophic for humans and other species to reconcile sustainability with hierarchy theory we must decide which hierarchical level in a system we want to sustain indefinitely and accept that lower level subsystems must have shorter life spans in economic analysis inter temporal discount rates essentially tell us how long we should care about sustaining any given system economists distinguish between discount rates for individuals based on personal time preference lower discount rates for firms based on the opportunity cost of capital and even lower discount rates for society for issues affecting even higher level systems such as global climate change many economists question the suitability of discounting future values at all we argue that to reconcile sustainability with inter temporal discounting discount rates should be determined by the hierarchical level of the system being analyzed

provision of a public good with multiple dynasties carbon emissions create externalities across countries and generations these externalities depend on the degree of contemporaneous cooperation and intergenerational altruism i study the relative importance of these features in determining equilibrium climate policy by imbedding an olg framework with intergenerational altruism into a differential game among dynasties each representing a coalition of nations there is an isomorphism between pure and paternalistic altruism i illustrate the multiplicity of equilibria using an analytic linear in state model equilibrium steady states are more sensitive to small changes in cooperation than altruism consideration of large changes in altruism and cooperation can reverse this ranking

how certain are we about the certainty equivalent long term social discount rate theoretical arguments for using a term structure of social discount rates sdr that declines with the time horizon have influenced government guidelines in the us and europe the certainty equivalent discount rate that often underpins this guidance embodies uncertainty in the primitives of the sdr such as growth for distant time horizons the probability distributions of these primitives are ambiguous and the certainty equivalent itself is uncertain yet if a limited set of characteristics of the unknown probability distributions can be agreed upon sharp upper and lower bounds can be defined for the certainty equivalent sdr unfortunately even with considerable agreement on these features these bounds are widely spread for horizons beyond 75 years so while estimates of the present value of intergenerational impacts including the social cost of carbon can be bounded in the presence of this ambiguity they typically remain so imprecise as to provide little practical guidance

when do fiscal consolidations lead to consumption booms lessons from a laboratory experiment according to the expectations channel a fiscal consolidation may give rise to less contractionary or even expansionary effects on consumption despite a decline in current disposable income intuitively people may accumulate a stock of savings in anticipation of the consolidation and may start to reduce their savings to support consumption once it occurs we design a laboratory experiment to study the conditions under which the expectations channel operates our results indicate that fiscal contractions that occur in an unsustainable fiscal environment exert less contractionary effects on consumption which supports the expectations channel we also find that the expectations channel is more pronounced if the fiscal authority can convincingly commit to abstain from tax increases in the future whereas increasing subjects level of awareness by running a transparent policy has only little influence on the outcomes

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

present bias and collective dynamic choice in the lab we study collective decisions by time discounting individuals choosing a common consumption stream we show that with any heterogeneity in time preferences utilitarian aggregation necessitates a present bias in lab experiments three quarters of social planners exhibited present biases and less than two percent were time consistent roughly a third of subjects acted as if they were pure utilitarians and the rest chose as if they also had varying degrees of distributional concerns

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

valuation of natural capital under uncertain substitutability abstract natural capital is complex to value notably because of the high uncertainties surrounding the substitutability of its future ecosystem services we examine a lucas economy in which a consumption good is produced by combining different inputs one of them being an ecosystem service that is partially substitutable with other inputs the growth rate of these inputs and the elasticity of substitution evolve in a stochastic way we characterize the socially efficient ecological discount rates that should be used to value future ecosystem services at different time horizons we show that the inverse of the elasticity of substitution can be interpreted as the ccapm beta of natural capital we also show that any increase in risk of this beta reduces the ecological discount rate if our collective beliefs about the elasticity of substitution of ecosystem services are gaussian the ecological discount rates go to minus infinity for finite maturities in that case a marginal increase in natural capital has an infinite value we provide a realistic calibration of the model that is coherent with observed asset prices by using the model of extreme events of barro 2006 the bliss maturity for infinite discount factors is less than 100 years in this calibration

social discounting under uncertainty a cross country comparison recent research suggests that social cost benefit analysis should be conducted with a declining discount rate for instance newell and pizer discounting the distant future how much do uncertain rates increase valuations j environ econ manage 46 2003 52 71 show that the us certainty equivalent discount rate declines through time using a simple autoregressive model of us interest rates this paper extends that line of research estimating both autoregressive and regime switching models of real interest rates to determine certainty equivalent discount rates in australia canada germany and the uk it is found that the regime switching model is a better model of past interest rate behavior for all four countries this model tends to produce a more rapid decline in certainty equivalent discount rates the paper provides applications to the economics of climate change and nuclear power

cost benefit assessment of energy efficiency investments accounting for future resources savings and risks in the australian residential sector this article focuses on the impact of the discount rate on cost benefit assessment of investment options for residential building efficiency an integrated thermal modeling life cycle costing approach is applied to an extensive sample of dominant house designs for australian conditions the relative significance of predicted thermal performance and the applied discount rate on the present value of energy savings from alternative investment scenarios is investigated costs and benefits are also evaluated at the economy wide scale including carbon pricing considerations and for a test case household faced with alternative investment options at the point of construction the influence of the applied discount rate on produced cost benefit calculations is investigated as is the interaction between critical cost benefit input parameters findings support that the discounting framework is the primary driver of difference in estimates about costs and benefits of higher standards of efficiency in the residential sector results demonstrate that agreement on a low discount rate based on sustainability principals would prioritise those projects with significant environmental benefits

fat tails exponents extreme uncertainty simulating catastrophe in dice abstract the problem of low probability catastrophic risk is increasingly central to discussion of climate science and policy but the integrated assessment models iams of climate economics rarely incorporate this possibility what modifications are needed to analyze catastrophic economic risks in an iam we explore this question using dice a well known iam we examine the implications of a fat tailed probability distribution for the climate sensitivity parameter a focus of recent work by martin weitzman and the shape of the damage function one of the issues raised by the stern review forecasts of disastrous economic outcomes in dice can result from the interaction of these two innovations but not from either one alone

testing ricardian equivalence under uncertainty this paper uses experimental methods to analyze ricardian equivalence when the probability of debt retirement is less than one the results suggest that the presence of outstanding debt and the probability of debt retirement have a strong influence on savings behavior when the probability of debt retirement is low consumption by the current generation increases as predicted by keynesian theory however as the probability of debt retirement increases bequests rise to offset the future generation s expected repayment liability and deficit spending becomes much less expansionary as predicted by ricardian theory in general the average bequest is significantly larger when an outstanding debt is passed on to the next generation than when no debt exists regardless of the probability of debt retirement however as long as there is some uncertainty about debt repayment the presence of debt always stimulates some additional consumption so that strong variants of ricardian equivalence are not found

curing germany s health care system by mandatory health premia a current proposal for reforming the german statutory health insurance suggests replacing earnings related contributions by per capita health premia combining a computable general equilibrium analysis with abundant empirical data on heterogenous household types we investigate both the distributional and allocative impact of such a reform proposal our results indicate efficiency gains in terms of gdp and employment this is because employed households of all skill types would increase their labour supply yet while these household types would benefit from introducing health premia others such as those including pensioners or unemployed individuals may suffer in terms of equivalent variations despite tax financed compensating transfers to these low income households nonetheless such transfers are an essential part of the reform proposal in order to mitigate redistributional effects by comparing two different compensation schemes we find that higher transfers go along with higher gdp and employment this result may indicate that more redistribution comes at no efficiency costs

long forward and zero coupon rates can never fall in frictionless markets having no arbitrage the asymptotic zero coupon rate never falls the same is true of the long forward rate the long par coupon rate can rise and fall due to forward rate movements at short maturities this article relates the three types of interest rates and formalizes and proves the impossibility results for falling asymptotic rates these results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates the results show that it is not possible to specify arbitrarily the long forward or zero coupon rate process copyright 1996 by university of chicago press

lifecycle consumption under different income profiles evidence and theory abstract we report on a series of economic decision making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles representing different pension replacement rates we aim to assess whether variations in pension replacement rates might aid or hinder individuals ability to make good lifecycle consumption and saving plans we find that pension replacement rates matter for subjects experimental payoffs and consumption behavior in particular our treatment with a 100 pension replacement rate yields the highest experimental payoff and more subjects in this treatment choose the status quo strategy of consuming endowments in every period we show that a model of rational inattention is useful for explaining subjects responses to different pension replacement rates

properties of the social discount rate in a benthamite framework with heterogeneous degrees of impatience this paper derives the properties of the discount rate that should be applied to a public sector project when the affected population has heterogeneous degrees of impatience we show that for any distribution of discount rates the social discount rate has the following properties it decreases over time it is lower than the average of the discount rates in the population and it converges to the discount rate of the most patient individual in the economy these properties hold for both constant and decreasing individual discount rates finally we evaluate how changes in the distribution of individual discount rates affect the social discount rate

discounting under uncertainty disentangling the weitzman and the gollier effect the uncertainty of future economic development affects the term structure of discount rates and thus the intertemporal weights that are to be used in cost benefit analysis the u k and france have recently adopted a falling term structure to incorporate uncertainty and the u s is considering a similar step a series of publications discusses the following concern a seemingly analogous argument used to justify falling discount rates can also justify increasing discount rates we show that increasing and decreasing discount rates mean different things can coexist are created by different channels through which risk affects evaluation and have the same qualitative effect of making long term payoffs more attractive

the malleability of undiscounted utilitarianism as a criterion of intergenerational justice discounting future utilities is often justified by the ethically motivated objective of protecting earlier generations from the excessive saving that seems to be implied by undiscounted utilitarianism in productive economies we question this justification of discounting by showing that undiscounted utilitarianism has sufficient malleability within important classes of technologies any efficient and non decreasing allocation can be the unique optimum according to an undiscounted utilitarian criterion for some choice of utility function

why the far distant future should be discounted at its lowest possible rate abstract a critical feature of the distant future is currently unresolvable uncertainty about what will then be the appropriate rate of return on capital to use for discounting this paper shows that there is a well defined sense in which the lowest possible interest rate should be used for discounting the far distant future part of any investment project some implications are discussed for evaluating long term environmental projects or activities like measures to mitigate the possible effects of global climate change

union contracts and the life cycle permanent income hypothesis this paper isolates households in the psid whose heads can be matched to particular long term union contracts with high confidence the author uses use published information on these contracts to construct a household specific measure of expected wage growth he finds that predictable wage movements are significantly correlated with consumption changes contrary to neoclassical consumption theory the author finds that consumption responds more strongly to predictable income declines than to predictable income increases this asymmetry is inconsistent with liquidity constraints and myopia but is qualitatively consistent with models in which preferences exhibit loss aversion copyright 1995 by american economic association

discounting the distant future how much do uncertain rates increase valuations abstract we demonstrate that when the future path of the discount rate is uncertain and highly correlated the distant future should be discounted at significantly lower rates than suggested by the current rate we then use two centuries of us interest rate data to quantify this effect using both random walk and mean reverting models we compute the certainty equivalent rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future under the random walk model we find that the certainty equivalent rate falls continuously from 4 to 2 after 100 years 1 after 200 years and 0 5 after 300 years at horizons of 400 years the discounted value increases by a factor of over 40 000 relative to conventional discounting applied to climate change mitigation we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits

on the valuation of long dated assets i show that the pricing of a broad class of long dated assets is driven by the possibility of extraordinarily bad news this result does not depend on any assumptions about the existence of disasters nor does it apply only to assets that hedge bad outcomes indeed it applies even to long dated claims on the market in a lognormal world if the market s sharpe ratio is higher than its volatility as appears to be the case in practice

welfare as equity equivalents equity or its counterpart inequity plays a fundamental role in the evaluation of social welfare in different dimensions in this paper we revisit the concept of inequity in the sense of unequal distributions across individuals time and states of the world using a unified framework that generalizes the standard expected discounted utilitarianism approach we propose a general measure of welfare as equity equivalents and a corresponding inequity index we show that allowing for different attitudes toward inequity across different dimensions covers a scope of possible inequity preferences with different interpretations we then prove that the order of aggregation across the different dimensions matters for welfare evaluations finally we show that many of the welfare theoretical approaches recently developed in the literature can be interpreted as special cases of this general framework

technology and time inconsistency policy makers have time inconsistent preferences if they fear losing power or are endowed with hyperbolic discount factors politicians may thus seek to influence future policy choices for example

five capital impact assessment appraisal framework based on theory of sustainable well being abstract this paper sets out to formulate an appraisal approach in context with sustainable development in conventional project appraisal such as energy undertakings most emphasis is placed on financial flows and rate of return on infrastructure investments although current greenhouse gas emissions are estimated to pose large costs on future generations these emissions are generally not estimated as part of the investment cost other public goods may also be omitted because their value is not recognized we review conventional cost benefit assessment and propose a new broader evaluation this new evaluation approach is based on the theory that five capital value types support long term well being rather than economic growth alone the theory states that humans depend on the size of stocks and flows from natural manufactured human social and financial capital we describe the five capitals to illustrate the value categories and outline an approach to evaluate all these in the context of energy development

how should the distant future be discounted when discount rates are uncertain abstract the so called weitzman gollier puzzle is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results the puzzle is resolved when agents optimize their consumption plans the long run discount rate declines over time toward its lowest possible value

determining the generalized discount rate for risky projects it is widely recognized that the evaluation of risky projects critically depends on how the riskiness of future benefits is treated standard discounting theories are based on the assumption that risks that are uncorrelated with aggregate risk are diversified so that projects idiosyncratic risk is not priced however this may not be true for long term risky projects such as those with persistent idiosyncratic shocks in this study we investigate the impact of both aggregate risk and nondiversifiable idiosyncratic risk on the discount rate for risky projects we extend the generalized discount rate to the case of persistent shocks a particular advantage of the generalized discount rate is that it can be applied in the setting of incomplete markets we show that nondiversifiable idiosyncratic risk reduces the discount rate and increases the present value of projects future uncertain benefits we further apply our findings to the evaluation of emissions reduction projects

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

gamma discounters are short termist weitzman 1998 2001 proposed a simple gamma discounting method to characterize the term structure of discount rates today from the sole distribution of future spot interest rates this rule which justifies using a smaller discount rate for longer maturities is now used for long term policy evaluations in the uk france norway and potentially in the us but we show that there is no social preference within the discounted expected utility framework that generically supports this pricing model and its underlying criterion the expected net present value rule considering a standard lucas tree economy we characterize the term structure from a coherent joint distribution of future spot interest rates and future consumption levels when future growth rates are positively serially correlated efficient discount rates today are decreasing with maturity and the gamma discounting rule yields discount rates that are larger than the efficient ones

global mechanisms for sustaining and enhancing pes schemes article i nfo an international payment for ecosystem service ipes schemes may be one of the only mechanisms available to stimulate the provision of vital non marketed ecosystem services at the global level as those nations that benefit from global ecosystem services ges cannot readily force other sovereign nations to provide them currently international trade offers trillions of dollars in incentives for countries to convert natural capital into marketable goods and services and few payments to entice countries to conserve natural capital in order to sustain critical non marketed ecosystem services we examine the biophysical characteristics of climate change and biodiversity to understand the obstacles to developing effective ipes schemes we find that none of the existing schemes for providing ges are adequate given the scale of the problem a cap and auction scheme for co2 emissions among wealthy nations could fund ipes and simultaneously deter carbon emissions to disburse funds we should adapt brazil s icms ecologico and apportion available funds to targeted countries in proportion to how well they meet specific criteria designed to measure the provision of ges individual countries can then develop their own policies for increasing provision of these services ensured of compensation if they do so indirect ipes should include funding for freely available technologies that protect or provide ges such as the low carbon energy alternatives that will be essential for curbing climate change markets rely on the price mechanism to generate profits which rations technology to those who can afford it reducing adoption rates innovation and total value

the effect of unemployment on consumption an experimental analysis this paper reports on an experiment that investigates the apparently robust phenomenon of over sensitivity of consumption to current income using a particularly simple formulation we also investigate whether individuals correctly respond to their employment status we find that subjects over react our data enables us to investigate where this over sensitivity originates we conclude that economic agents differ in their ability to plan ahead and understand the dynamic process determining their employment status however agents seem able to respond appropriately to changes in the parameters governing their decision processes in that the comparative static predictions of the theory are largely confirmed

armington elasticities for energy policy modeling evidence from four european countries elasticities of substitution among imports and competing domestic production armington elasticities play an important role in computable general equilibrium cge assessments of energy and climate policy this paper provides estimates of armington elasticities for 15 commodity groups in four european countries since armington elasticities are found to be rather low on average researchers may want to reconsider the device of using high values of armington elasticities in cge models to avoid unrealistic competitiveness effects or emission leakage rates associated with energy or carbon taxes or other forms of energy related regulation estimated elasticities tend to be higher in the case of machinery and other investment goods than in the case of primary products ores and chemicals as well as consumer goods

discounting risk and inequality a general approach the common practice consists in using a unique value of the discount rate for all public investments endorsing a social welfare approach to discounting we show how different public investments should be discounted depending on the risk on the returns on investment the systematic risk on aggregate consumption the distribution of gains and losses and inequality we also study the limit value of the discount rate for very long term investments we highlight the type of information that is needed about long term scenarios in order to evaluate investments

gamma discounting and expected net future value recent research suggests that the long term future should be discounted with a declining discount rate one such line of research exemplified by weitzman gamma discounting amer econ rev 91 2001 261 271 shows that the certainty equivalent discount rate is declining when future capital productivity is uncertain however in a recent paper gollier maximising the expected net future value as an alternative strategy to gamma discounting finan res lett 1 2004 85 89 puts forward a puzzle that casts doubt on the validity of this conclusion he asserts that using expected net future value rather than conventional expected net present value implies that the certainty equivalent discount rate increases over time this paper resolves the apparent puzzle by encompassing the models of gollier maximising the expected net future value as an alternative strategy to gamma discounting finan res lett 1 2004 85 89 and weitzman gamma discounting amer econ rev 91 2001 261 271 in fact gollier proves that as the evaluation date moves further into the future the discount rate at a given point in time will increase however given a particular evaluation date the schedule of discount rates is declining

consumer response to the reagan tax cuts abstract this paper uses micro data from the consumer expenditure survey to estimate the response of household consumption to the second and third phases of the reagan tax cuts since these phases were pre announced they allow for an unusually clean test of the canonical life cycle permanent income model consumption is found to be excessively sensitive to the tax cuts counter to the model liquidity constraints and other standard explanations do not appear to explain this excess sensitivity the consumption response is larger than previously estimated for tax refunds and more concentrated in nondurables these differences have important implications for the structure of tax changes in particular for choosing between varying withholding rates versus varying lumpy final tax payments and refunds

the ramsey discounting formula for a hidden state stochastic growth process the long term discount rate is critically dependent upon projections of future growth rates that are fuzzier in proportion to the remoteness of the time horizon this paper models such increasing fuzziness as an evolving hidden state stochastic process the underlying trend growth rate is an unobservable random walk hidden by noisy transitory shocks and recoverable only as a probability distribution via bayesian updating a simple expression is derived for the time declining ramsey discount rate the components of this hidden state ramsey discounting formula are then analyzed followed by a few remarks about possible implications and applications

reducing public health insurance expenditure a numerical analysis for germany in recent decades germany s statutory health insurance expenditure increased drastically to combat moral hazard moderate copayments for the purchase of prescription drugs were introduced and increased several times these measures however have been insufficient to buck the steadily increasing tide of germany s statutory health care expenditure making further reforms indispensable among a multitude of potential reform proposals such as a switch to a health premia regime are two policy options that provide for incentives to limit health care demand mandatory deductibles and further elevating copayments by combining an applied general equilibrium age model with abundant empirical data on heterogeneous household types this article investigates the economic effects of these two policy options thereby looking at both the current earnings related shi system and a hypothetical health premia regime characterized by per capita premia as a key outcome we find that the decrease in expenditure associa

risk adjusted gamma discounting abstract 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

discounting and growth in a growing economy investing in safe projects raises intergenerational inequalities this deteriorates social welfare because of inequality aversion as expressed by decreasing marginal utility of consumption the social discount rate can be interpreted as the minimum rate of return that is necessary to compensate for the increased inequality generated by the investment for an intuitive precautionary argument this growth effect is reduced if growth is uncertain to complete the picture if the investment raises the collective risk this discount rate should also contain a risk premium recent developments weitzman 1998 2001 2013 gollier 2008 arrow et al 2013 converge toward recommending using a smaller discount rate for safe assets maturing later in this paper i show that this recommendation applied to the risk free rate relies on the assumption that shocks on the growth rate of consumption exhibit some degree of persistence i also show that this implies in parallel an increasing term structure for the risk premium globally the risk adjusted discount rate will have a decreasing term structure only if the asset s beta is small enough

discretionary tax changes and the macroeconomy new narrative evidence from the united kingdom abstract this paper provides new estimates of the macroeconomic effects of tax changes using a new narrative dataset for the united kingdom identification is achieved by isolating exogenous tax policy changes using the romer and romer narrative strategy i find that a 1 percent cut in taxes increases gdp by 0 6 percent on impact and 2 5 percent over three years the findings are remarkably similar to romer and romer narrative estimates for the united states reinforcing the view that tax changes have powerful and persistent effects exogenous tax changes are also shown to have contributed to important episodes in the uk business cycle jel e23 e32 e62 h20 h61

do people care about future generations derived preferences from happiness data the main approaches for computing very long term discount rates revealed and stated preferences have limitations we overcome previous shortcomings using derived preferences i e we retrieve information on very long term time preferences from happiness data and people s expectations about the living conditions of future generations we account for possible endogeneity between expectations about the future and current well being using 2sls we find that negative positive expectations about future generations have a very large negative positive impact on subjective well being this finding suggests that the very long term discount rate is lower than implied by most traditional economic analyses

designing climate mitigation policy this us paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs damage valuation policy instrument choice technological innovation and international climate policy the authors begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be both under cost effective stabilization of global climate and under net benefit maximization or pigouvian emissions pricing the remainder of the paper focuses on the appropriate scope of regulation issues in policy instrument choice complementary technology policy and international policy architectures

on discounting and voting in a simple growth model abstract in dynamic resource allocation models the non existence of voting equilibria is a generic phenomenon due to the multi dimensionality of the choice space even if agents are heterogeneous only in their discount factors nevertheless at each point in time there may exist a median voter whose preferred instantaneous consumption rate is supported by a majority of agents based on this observation we propose an institutional setup intertemporal majority voting in a ramsey type growth model with common consumption and heterogeneous agents and show that it provides a microfoundation of the choice of the optimal consumption stream of the median agent while the corresponding intertemporal consumption stream is in general not a condorcet winner among all feasible paths its induced instantaneous consumption rates receive a majority at each point in time in the proposed intertemporal majority voting procedure we also provide a characterization of stationary voting equilibria in the case where agents may differ not only in their time preferences but also in their felicity functions

experimental tests of ricardian equivalence this study employs laboratory experiments to test aspects of ricardian equivalence an overlapping generations model forms the basis of the experimental design whenever ricardian equivalence predicts a positive bequest outcomes close to those predicted occur after allowance for learning observed deviations from ricardian equilibrium are small but biased in a keynesian direction changes in bequests do not fully offset changes in government debt the imposition of a binding nonnegativity constraint on bequests produces the predicted neoclassical behavior the cost to the players of deviations from the theoretical equilibrium is apparently an important determinant of the variability of observed deviations

intergenerational discounting with intragenerational inequality in consumption and the environment it is now established that the consumption discount rate is determined by the growth of consumption multiplied by the elasticity of marginal utility but distributive concerns are rarely reflected in the literature assuming a social welfare function with inequality aversion we consider a consumption discount rate that can be decomposed into the growth effect and the intragenerational distribution effect the framework is then extended to include population change and inequality in the environment as an amenity in a utility with constant elasticity of substitution numerical examples illustrate that distributional effects turn non negligibly negative that may reduce consumption discount rate by 1 3 for plausible parameters once distribution is adjusted for both population and the environment

prioritarianism and climate change prioritarianism is the ethical view that gives greater weight to well being changes affecting individuals at lower well being levels this view is influential both in moral philosophy and in theoretical work on social choice where it is captured by a social welfare function swf summing a concave transformation of individual well being numbers however prioritarianism has largely been ignored by scholarship on climate change this article compares utilitarianism and prioritarianism as frameworks for evaluating climate policy it reviews the distinctive normative choices that are required for the prioritarian approach specifying a ratio scale for well being if the prioritarian swf takes the standard atkinson form determining the degree of concavity of the transformation function i e the degree of social inequality aversion and choosing between ex ante and ex post prioritarianism under conditions of risk the article also sketches some of salient implications of a prioritarian swf for climate policy with respect to the social cost of carbon the social discount rate optimal mitigation and the dismal theorem finally it discusses the issue of variable population

be careful what you calibrate for social discounting in general equilibrium abstract concerns about intergenerational equity have led to an influential practice of setting social utility discount rates based on ethical considerations rather than to match household behavior particularly in climate change economics e g stern 2006 this paper formalizes the broader policy implications of this approach in general equilibrium by characterizing jointly optimal environmental and fiscal policies in a climate economy model with differential planner household discounting first i show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy if the government discounts the future less than households implementing the optimal allocation requires an effective capital income subsidy a negative intertemporal wedge and in a setting with distortionary taxation an effective labor consumption tax wedge that is decreasing over time second if the government cannot subsidize capital income the constrained optimal carbon tax may be up to 50 below the present value of marginal damages the social cost of carbon due to the general equilibrium effects of climate policy on household savings third given the choice to optimize either carbon capital or labor income taxes the socially discounting planner s welfare ranking is ambiguous over a standard range of parameters overall in general equilibrium a policy maker s choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy

intergenerational altruism with future bias abstract we show that standard preferences of altruistic overlapping generations exhibit future bias which involves preference reversals associated with increasing impatience this underlies a conflict of interest between successive generations we explore the implications of this conflict for intergenerational redistribution when there is a sequence of utilitarian governments representing living generations and choosing policies independently over time we argue that future bias creates incentives to legislate and sustain a pay as you go pension system which every government views as a self enforcing commitment mechanism to increase future old age transfers

economics and climate change integrated assessment in a multi region world this paper develops a model that integrates the climate and the global economy an integrated assessment model with which different policy scenarios can be analyzed and compared the model is a dynamic stochastic general equilibrium setup with a continuum of regions thus it is a full stochastic general equilibrium version of rice nordhaus s pioneering multi region integrated assessment model like rice our model features traded fossil fuel but otherwise has no markets across regions there is no insurance nor any intertemporal trade across them the extreme form of market incompleteness is not fully realistic but arguably not a bad approximation of reality its major advantage is that along with a set of reasonable assumptions on preferences technology and nature it allows a closed form model solution we use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil consuming and producing regions we show that surprisingly only taxes on oil producers can improve the climate taxes on oil consumers have no effect at all the calibrated model suggests large differences in views on climate policy across regions

uncertain discount rates in climate policy analysis abstract consequences in the distant future such as those from climate change have little value today when discounted using conventional rates this result contradicts our gut feeling about such problems and often leads to ad hoc application of lower rates for valuations over longer horizons a step facilitated by confusion and disagreement over the correct rate even over short horizons we review the theory and intuition behind the choice of discount rates now and importantly the impact of likely variation in rates in the future correlated changes in future rates imply that the distant future should be discounted at much lower rates than suggested by the current rate thereby raising the value of future consequences regardless of opinions concerning the current rate using historic data to quantity the likely changes and correlation in changes in future rates we find that future valuations rise by a factor of many thousands at horizons of 300 years or more almost doubling the expected present value of climate mitigation benefits relative to constant 4 discounting ironically uncertainty about future rates reduces the ratio of valuations based on alternate choices of the current rate

equilibrium resource management with altruistic overlapping generations abstract we imbed a classic fishery model where the optimal policy follows a most rapid approach path to a steady state into an overlapping generations setting the current generation discounts future generations utility flows at a rate possibly different from the pure rate of time preference used to discount their own utility flows the resulting model has non constant discount rates leading to time inconsistency the unique markov perfect equilibrium to this model has a striking feature provided that the current generation has some concern for the not yet born the equilibrium policy does not depend on the degree of that concern

heterogeneous patience bargaining power and investment in future public goods in many environmental contexts including climate change mitigation agents face investment opportunities that have shared but greatly delayed benefits efficient levels of aggregate investment therefore require collective action but they are also highly sensitive to the choice of discount rate motivated by empirical evidence that suggests discount rates vary considerably this paper investigates the impact of heterogeneity in discount rates on sharing of investment costs an application of the canonical bargaining model shows that the larger share of the costs gradually shifts from impatient to patient agents as the time horizon increases

the equivalency principle for discounting the value of natural assets an application to an investment project in the basque coast making decisions about optimal investments in green infrastructure necessitates setting social discount rates this paper suggests a practical way for determining the discount rate for projects or programmes in which one of the options is to maintain or improve land in its natural state we propose an a equivalency principlea to derive a simple rule that sets the discount rate the rule is based on the premise that the long term value of a naturally preserved land track ought to be at least the same as the value of an identical land track in the vicinity to which permission has been granted for development we illustrate this principle with various case studies and we apply it to a contentious investment project in the basque country associated with the regeneration of a large scale harbour in the province of gipuzkoa north of spain that involves reclaiming natural land that has important ecological value including for the conservation of a marine ecosystem

rationalizing hyperbolic discounting abstract we show that if agents are uncertain about their discount rates it may be rational for them to discount the distant future hyperbolically rather than exponentially our findings thus may rationalize a common observation in experimental work which indicates that people discount the future at hyperbolic rates we show that under some assumptions uncertainty over hazard rates may lead to non constant discounting but not imply dynamically inconsistent behavior under other assumptions uncertainty over discount rates can lead to dynamically inconsistent behavior like violating planned consumption profiles by bringing consumption forward

consumer response to tax rebates many households received income tax rebates in 2001 of 300 or 600 these rebates represented advance payments of the tax cut from the new 10 percent tax bracket based on a survey of a representative sample of households this paper finds that only 22 percent of households receiving the rebate would spent it instead they would either save it or use it to pay off debt this very low rate of spending represents a striking break with past behavior which would have suggested a much higher rate of spending the low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand this abstract was borrowed from another version of this item

learning ricardian equivalence abstract this paper tests whether subjects learn to comply with the ricardian equivalence proposition in a life cycle consumption laboratory experiment our results suggest that ricardian equivalence does not hold on average tax changes have a significant and strong impact on consumption choice using individual consumption time series the behaviour of 56 of our subjects can be classified as inconsistent with the ricardian equivalence proposition classifying subjects according to rules of thumb that best describe their behaviour we find that subjects switch less to rules that theoretically violate ricardian equivalence in later rounds compared to earlier rounds this implies that some subjects learn to comply with ricardian equivalence by changing their consumption strategy however the aggregate effect of taxation on consumption persists even after eight rounds of repetition

rules of thumb versus dynamic programming this paper studies decision making with rules of thumb in the context of dynamic decision problems and compares it to dynamic programming a rule is a fixed mapping from a subset of states into actions rules are compared by averaging over past experiences this can lead to favoring rules which are only applicable in good states correcting this good state bias requires solving the dynamic program we provide a generalframework and characterize the asymptotic properties we apply it to provide a candidate explanation for the sensitivity of consumption to transitory income jel eoo c63 c61 e21

monetary valuation of the social cost of co2 emissions a critical survey an expanding branch of research has estimated the potential costs of climate change which are often expressed as the social cost of carbon scc or the costs of an additional ton of co2 emissions estimates of the scc can be used by policy makers to evaluate climate change policies and greenhouse gas emission reduction projects by means of cost benefit analyses cbas such analyses are complicated by the wide range of scc values that have been reported in the literature and the large uncertainties involved in estimating the potential economic impacts and related costs of climate change this study presents a critical review of the reported scc estimates by examining some neglected consequences of climate change uncertain and extreme scenarios of climate change the discounting of future climate change effects the treatment of individual risk aversion and assumptions about social welfare in view of the many uncertainties and omissions in conventional cost benefit analyses of climate impacts and the scc alternative approaches to decision making should be considered for climate policy

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

empirical and public choice evidence for hyperbolic social discount rates and the implications for intergenerational discounting the derivation of the correct discount rate for intergenerational projects in cost benefit analysis is particularly contentious public choice has resulted in lower discretionary exponential discount rates for many intergenerational projects in britain and the usa this is shown to be strong indirect evidence that the true social discount rate may be a hyperbolic rather than an exponential function there is also empirical evidence for this hypothesis the hyperbolic nature of discounting is also a standard finding in the behavioural sciences for intergenerational time frames hyperbolic discount rates should be employed together with exponential discount rates in cost benefit sensitivity analyses

hyperbolic discounting of the far distant future abstract we prove an analogue of weitzman s 1998 famous result that an exponential discounter who is uncertain of the appropriate exponential discount rate should discount the far distant future using the lowest i e most patient of the possible discount rates our analogous result applies to a hyperbolic discounter who is uncertain about the appropriate hyperbolic discount rate in this case the far distant future should be discounted using the probability weighted harmonic mean of the possible hyperbolic discount rates

genetic algorithm learning and the cobweb model this paper presents the cobweb model in which competitive firms in a market for a single good use a genetic algorithm to update their decision rules about next period production and sales the results of simulations show that the genetic algorithm converges to the rational expectations equilibrium for a wider range of parameter values than other algorithms frequently studied within the context of the cobweb model price and quantity patterns generated by the genetic algorithm are also compared to the data of experimental cobweb economies it is shown that the algorithm can capture several features of the experimental behavior of human subjects better than three other learning algorithms that are considered

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

assessing the economic viability of alternative water resources in water scarce regions combining economic valuation cost benefit analysis and discounting abstract this paper demonstrates a comprehensive methodology for assessing the viability of an environmental management plan that has long run economic and ecological impacts the case study under consideration is the implementation of a water resource management plan in a water scarce region of the world namely cyprus specifically this plan proposes to replenish a depleting aquifer with treated wastewater the proposed methodology first identifies the key stakeholder groups farmers and the general public who are hypothesized to derive economic values benefits from implementation of this plan and then uses stated preference methods to capture the total economic value of these benefits benefits are aggregated over the relevant populations of these stakeholder groups and weighed against the total costs of implementing the plan in a long run cost benefit analysis cba an econometrically estimated time declining trajectory of discount rates is used for the cba in order to assess the long run sustainability of the plan the results reveal that the net benefit trajectory estimated with the time declining discount rate takes one and a half to three times as long to come to a plateau compared to the constant discount rates of 3 5 and 6 emphasizing the importance of using declining discount rates and capturing the entirety of the benefits generated by such plans this methodology is particularly recommended for providing much needed information to support the implementation of the eu water framework directive which advocates the use of cba with consideration of the notion of sustainability for achieving the good water status for all european waters

explaining the facts with adaptive agents the case of mutual fund flows abstract this paper studies portfolio decisions of boundedly rational agents in a financial market learning is modeled via a genetic algorithm learning as modeled in this paper leads agents to hold too much risk as compared to the optimal portfolio of rational investors moreover adaptive agents exhibit an asymmetric response after positive and negative returns where the portfolio adjustment is more pronounced after negative returns it is demonstrated that investors in mutual funds show the same investment patterns as the adaptive agents in the model a model with entry and exit of agents is able to match the mutual fund data closely

discounting the distant future an experimental investigation we use a laboratory experiment to elicit discount rates over a 20 year time horizon using government savings bonds as a payment vehicle when using a constant exponential discount rate function we find an implied average discount rate of 4 9 which is much lower than has been found in previous experimental studies that used time horizons of days or months however we also find strong support for non constant declining discount rates for longer time horizons with an extrapolated implied annual discount rate approaching 0 5 in 100 years there is heterogeneity in discount rates and risk preferences in that people with more optimistic beliefs about technological progress have higher discount rates these findings contribute to the debate over the appropriate discount rate to use in comparing the long term benefits of climate change mitigation to the more immediate costs

declining discount rates and the fisher effect inflated past discounted future uncertain and persistent real interest rates underpin one argument for using a declining term structure of social discount rates in the expected net present value enpv framework despite being controversial this approach has influenced both the inter agency working group on cost benefit analysis and the uk government s guidelines on discounting we first clarify the theoretical basis of the enpv approach then rather than following previous work which used a single series of u s treasury bond returns we treat nominal interest rates and inflation as co integrated series and estimate the empirical term structure of discount rates via the fisher effect this nests previous empirical models and is more flexible it also addresses an irregularity in previous work which used data on nominal interest rates until 1950 and real interest rates thereafter as we show the real and nominal data have very different time series properties this paper therefore provides a robustness check on previous discounting advice and updated methodological guidance at a time when governments around the world are reviewing their guidelines on social discounting the policy implications are discussed in the context of the social cost of carbon nuclear decommissioning and public health

the savers spenders theory of fiscal policy the macroeconomic analysis of fiscal policy is usually based on one of two canonical models the barro ramsey model of infinitely lived families or the diamond samuelson model of overlapping generations this paper argues that neither model is satisfactory and suggests an alternative in the proposed model some consumers plan ahead for themselves and their descendants while others live paycheck to paycheck this model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation and it yields some new and surprising conclusions about fiscal policy

the economics of the climate i review the economic characteristics of the climate problem focusing on the choice of discount rates in the presence of a stock externality risk and uncertainty ambiguity and the role of integrated assessment models iams in analyzing policy choices i suggest that iams can play a role in providing qualitative understanding of how complex systems behave but are not accurate enough to provide quantitative insights arguments in favor of action on climate issues have to be based on aversion to risk and ambiguity and the need to avoid a small but positive risk of a disastrous outcome

targets for global climate policy an overview a survey of the economic impact of climate change and the marginal damage costs shows that carbon dioxide emissions are a negative externality the estimated pigou tax and its growth rate are too low to justify the climate policy targets set by political leaders a lower discount rate or greater concern for the global distribution of income would justify more stringent climate policy but would imply an overhaul of other public policies catastrophic risk justifies more stringent climate policy but only to a limited extent

long term risk management of nuclear waste a real options approach in this paper we investigate the optimal timing for deep geological disposal of nuclear waste our model is based on the real options approach to investment under uncertainty in this context the problem is similar to the optimal exercise policy for a perpetual american spread option the potential usefulness of such a model for actual decision making on a sensitive issue is illustrated by some numerical simulations

positively gamma discounting combining the opinions of experts on the social discount rate the aggregated term structure of social discount rates that results from weitzman s 2001 survey of expert opinion is shown to be highly sensitive to the nature of the responses if variation reflects irreducible differences in ethical judgments the term structure can decline rapidly if variation occurred because respondents were forecasting future rates under uncertainty the term structure is much flatter because additional experts provide new information the former approach triples the social cost of carbon when compared to the latter the distinction between heterogeneity and uncertainty illustrates the need for a nuanced treatment of survey data in intergenerational policy making

the sensitivity of tests of the intertemporal allocation of consumption to near rational alternatives suppose a consumer sets consumption equal to income each period rather than following the optimal permanent income decision rule how much utility does he lose this paper finds that the answer is typically less than 10 cents 1 per quarter in environments specified by popular tests on aggregate data it includes calculations of the costs of excess sensitivity and excess smoothness to income and interest rate changes and the costs of ignoring information it concludes that the theory does not make predictions for aggregate tests that are robust to small costs such as information or transactions copyright 1989 by american economic association

discounting inside the washington d c beltway places more weight on costs and benefits in the near term over costs and benefits in the future the choice of the discount rate is therefore critical in evaluating the merits of many public policy proposals this article focuses on how the choice of discount rate can dramatically affect policy choices these policies include whether to build a bridge whether to privatize a power marketing administration which sells electricity generated by government owned facilities such as dams how much money should be spent on early childhood education or options for reforming social security the ongoing challenge is to discount future costs or benefits in a way that matches the project s level of riskiness we begin by discussing the underlying issues in choosing an appropriate discount rate we then discuss the variety of different discount rates that are actually used by various washington policymakers and the biases they often generate

discounting the distant future how much does model selection affect the certainty equivalent rate evaluating investment with long term consequences using discount rates that decline with the time horizon declining discount rates of ddrs means that future welfare changes are of greater consequence in present value terms recent work in this area has turned towards operationalising the theory and establishing a schedule of ddrs for use in cost benefit analysis using us data we make the following points concerning this transition i model selectionhas important implications for operationalising a theory of ddrs that depends upon uncertainty ii misspecification testing naturally leads to employing models that account for changes in the interest reat generating medanism lastly we provide an analysis of the policy implications of ddrs in the context of climate change for the us and show that the use of a state space model can increase valuations by 150 compared to conventional constant discounting