Gamma Discounting
American Economic Review · 2001 · Volume 91 · Issue 1
Abstract
By incorporating the probability distribution directly into the analysis, this paper proposes a new theoretical approach to resolving the perennial dilemma of being uncertain about what discount rate to use in cost-benefit analysis. A numerical example is constructed from the results of a survey based on the opinions of 2,160 economists. The main finding is that even if every individual believes in a constant discount rate, the wide spread of opinion on what it should be makes the effective social discount rate decline significantly over time. Implications and ramifications of this proposed "gamma-discounting" approach are discussed.
Keywords
Project Evaluation, Social Discount Rate, Allocative Efficiency, Cost-Benefit Analysis
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