Expected net present value, expected net future value, and the Ramsey rule

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Weitzman (1998) showed that when future interest rates are uncertain, using the expected net present value implies a term structure of discount rates that is decreasing to the smallest possible interest rate. On the contrary, using the expected net future value criterion implies an increasing term structure of discount rates up to the largest possible interest rate. We reconcile the two approaches by introducing risk aversion and risk-neutral probabilities. We show that if the aggregate consumption path is optimized, the two criteria are equivalent. Moreover, they are also equivalent to the Ramsey rule extended to uncertainty. Terms of use: Documents in EconStor mayJEL Code: D61.

Yes, We Should Discount the Far-Distant Future at Its Lowest Possible Rate: A Resolution of the Weitzman–Gollier Puzzle

“…This paper also makes methodological improvements on previous explanations for the puzzle. In contrast to Gollier (2009a), Gollier (2009b) and Buchholz and Schumacher (2009), the social planner remains risk neutral within the economy of this paper. This is consistent with the original paradox and shows that there is no requirement to call on risk aversion to resolve the problem.…”

“…This contrasts with Gollier (2004): "Clearly, Weitzman and I cannot be both right. In fact, to tell the truth, I believe that we are both wrong" (p.88), Hepburn and Groom (2007): "Our conclusion, perhaps surprisingly, is that Weitzman and Gollier are both right" (p.107), Gollier (2009a): "This demonstrates that, as suggested by Hepburn and Groom (2007), both Weitzman (1998) and Gollier (2004) are right" (p.6), Gollier (2009b): "In a sense, contrary to our conclusion in Gollier (2004), both Weitzman (1998) and Gollier (2004) are right..." (p.8) and Buchholz and Schumacher (2009): "Much more is in favor of Gollier's approach because he puts the risk to the right place, i.e. to the future period" (p.4).…”

“…Previous interesting proposed resolutions have been presented by Hepburn and Groom (2007), Gollier (2009a), Gollier (2009b) and Buchholz and Schumacher (2009). This paper makes a number of important extensions to this debate.…”

Using the Net Present Value Rule to Make Value-Creating Investment Decisions

“…The steps involved in applying the NPV [1][2][3] rule to evaluate an investment proposal are summarized in this paper. Tow inputs are required to calculate a project's NPV: (1) the expected cash-flow stream that the project will generate over its useful life and (2) the appropriate cost of capital that reflects the risk of the expected cash-flows.…”

Exponential discounting bias

“…Part of the debate is still centered on justifying why hyperbolic discounting should be considered a rational way to form intertemporal preferences, more than exponential discounting. Prelec (2004), Dimitri (2005), Drouhin (2009), Farmer and Geanakoplos (2009), and Gollier (2010) argue that hyperbolic discounting is time consistent and rational. Decreasing impatience in a stochastic environment allows for a formal proof of such claim.…”