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Discounting the distant future: How much do uncertain rates increase valuations?

dc.contributor.author Newell, RG
dc.contributor.author Pizer, WA
dc.date.accessioned 2014-09-08T14:20:40Z
dc.date.issued 2003-07-01
dc.identifier.issn 0095-0696
dc.identifier.uri https://hdl.handle.net/10161/9133
dc.description.abstract We demonstrate that when the future path of the discount rate is uncertain and highly correlated, the distant future should be discounted at significantly lower rates than suggested by the current rate. We then use two centuries of US interest rate data to quantify this effect. Using both random walk and mean-reverting models, we compute the "certainty-equivalent rate" that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future. Under the random walk model we find that the certainty-equivalent rate falls continuously from 4% to 2% after 100 years, 1% after 200 years, and 0.5% after 300 years. At horizons of 400 years, the discounted value increases by a factor of over 40,000 relative to conventional discounting. Applied to climate change mitigation, we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits. © 2003 Elsevier Science (USA). All rights reserved.
dc.publisher Elsevier BV
dc.relation.ispartof Journal of Environmental Economics and Management
dc.relation.isversionof 10.1016/S0095-0696(02)00031-1
dc.title Discounting the distant future: How much do uncertain rates increase valuations?
dc.type Journal article
duke.contributor.id Newell, RG|0418590
duke.contributor.id Pizer, WA|0564370
pubs.begin-page 52
pubs.end-page 71
pubs.issue 1
pubs.organisational-group Duke
pubs.organisational-group Duke Science & Society
pubs.organisational-group Economics
pubs.organisational-group Environmental Sciences and Policy
pubs.organisational-group Initiatives
pubs.organisational-group Institutes and Provost's Academic Units
pubs.organisational-group Nicholas School of the Environment
pubs.organisational-group Sanford School of Public Policy
pubs.organisational-group Trinity College of Arts & Sciences
pubs.publication-status Published
pubs.volume 46


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