Coase-Sandor Working Paper Series in Law and Economics
Publication Date
2011
Publication Title
Law & Economics Working Papers
Abstract
The choice of the proper discount rate is important in the analysis of projects whose costs and benefits extend into the future, a particularly striking feature of policies directed at climate change. Much of the literature, including prominent work by Arrow et al. (1996), Stern (2007, 2008), and Dasgupta (2008), employs a reduced-form approach that conflates social value judgments and individuals' risk preferences, the latter raising an empirical question about choices under uncertainty rather than a matter for ethical reflection. This article offers a simple, explicit decomposition that clarifies the distinction, reveals unappreciated difficulties with the reduced-form approach, and relates them to the literature. In addition, it explores how significant uncertainty about future consumption, another central factor in climate policy assessment, raises further complications regarding the relationship between social judgments and individuals' risk preferences.
Number
564
Recommended Citation
Louis Kaplow & David A. Weisbach, "Discount Rates, Judgments, Individuals’ Risk Preferences, and Uncertainty" (John M. Olin Program in Law and Economics Working Paper No. 564, 2011).
Additional Information
Chicago Unbound includes both works in progress and final versions of articles. Please be aware that a more recent version of this article may be available on Chicago Unbound, SSRN or elsewhere.