Discounting and Growth

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.

JEL codes

Replaces

Christian Gollier, Discounting and Growth, October 2013.

Reference

Christian Gollier, “Discounting and Growth”, American Economic Review, vol. 104, n. 5, 2014, pp. 534–537.