TY  - JOUR
AU  - Weitzman,Martin L.
TI  - Risk-Adjusted Gamma Discounting
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15588
PY  - 2009
Y2  - December 2009
UR  - http://www.nber.org/papers/w15588
L1  - http://www.nber.org/papers/w15588.pdf
N1  - Author contact info:
Martin Weitzman
Department of Economics
Harvard University
Littauer 313
Cambridge, MA 02138
Tel: 617/495-5133
Fax: 617/495-8570
E-Mail: mweitzman@harvard.edu
AB  - 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.
ER  -