Discounting and Growth
American Economic Review · 2014 · Volume 104 · Issue 5
Abstract
In a growing economy, the discount rate to evaluate a long-term investment is the minimum rate of expected return that compensates for the increased intergenerational inequalities. Because the growth rate is uncertain, there is a precautionary argument in favor of lowering the discount rate. If shocks to growth are persistent, this is a robust argument for using a smaller discount rate for more distant time horizons. If climate damages are positively correlated with future consumption, a risk premium should be added to the climate discount rate, which could have an increasing term structure.
Keywords
Allocative Efficiency, Cost-Benefit Analysis, Asset Pricing, Trading Volume, Bond Interest Rates, Project Evaluation, Social Discount Rate
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