Gamma discounters are short-termist

Gollier, Christian (2016) Gamma discounters are short-termist. Journal of Public Economics, 142. pp. 83-90.

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Official URL: http://tse-fr.eu/pub/30897

Abstract

Weitzman (1998, 2001) proposed a simple “gamma discounting” method to characterize the term structure of discount rates today from the sole distribution of future spot interest rates. This rule which justifies using a smaller discount rate for longer maturities is now used for long-term policy evaluations in the UK, France, Norway, and potentially in the US. But we show that there is no social preference within the discounted expected utility framework that generically supports this pricing model and its underlying criterion, the expected net present value rule. Considering a standard Lucas tree economy, we characterize the term structure from the joint distribution of future spot interest rates and future consumption levels. When future growth rates are serially correlated, efficient discount rates today are decreasing with maturity, and the gamma discounting rule yields discount rates that are larger than the efficient ones.

Item Type: Article
Language: English
Date: October 2016
Refereed: Yes
Uncontrolled Keywords: decreasing discount rates, term structure, uncertain growth, Weitzman-Gollier puzzle
JEL codes: E43 - Determination of Interest Rates; Term Structure of Interest Rates
G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading volume; Bond Interest Rates
Q54 - Climate; Natural Disasters
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 22 Sep 2016 09:13
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:30897
URI: http://publications.ut-capitole.fr/id/eprint/22383

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