Discounting the Distant Future: An Experimental Investigation

We use a laboratory experiment to elicit discount rates over a 20-year time horizon using government savings bonds as a payment vehicle. When using a constant (exponential) discount rate function, we find an implied average discount rate of 4.9 %, which is much lower than has been found in previous experimental studies that used time horizons of days or months. However, we also find strong support for non-constant, declining discount rates for longer time horizons, with an extrapolated implied annual discount rate approaching 0.5 % in 100 years. There is heterogeneity in discount rates and risk preferences in that people with more optimistic beliefs about technological progress have higher discount rates. These findings contribute to the debate over the appropriate discount rate to use in comparing the long-term benefits of climate change mitigation to the more immediate costs.     

Economic valuation of the Leuser National Park on Sumatra,Indonesia

The Leuser Ecosystem in Northern Sumatra is officially protected by its status as an Indonesian national park. Nevertheless, it remains under severe threat of deforestation. Rainforest destruction has already caused a decline in ecological functions and services. Besides, it is affecting numerous economic activities in and around the Leuser National Park. The objectives of this study are twofold: firstly, to determine the total economic value (TEV) of the Leuser Ecosystem through a systems dynamic model. And secondly, to evaluate the economic consequences of deforestation versus conservation, disaggregating the economic value for the main stakeholders and regions involved. Using a dynamic simulation model, economic valuation is applied to evaluate the TEV of the Leuser National Park over the period 2000–2030. Three scenarios are considered: ‘conservation’, ‘deforestation’ and, ‘selective use’. The results are presented in terms of (1) the type of benefits, (2) the allocation of these benefits among stakeholders, and (3) the regional distribution of benefits. The economic benefits considered include: water supply, fisheries, flood and drought prevention, agriculture and plantations, hydro-electricity, tourism, biodiversity, carbon sequestration, fire prevention, non-timber forest products, and timber. The stakeholders include: local community members, the local government, the logging and plantation industry, the national government, and the international community. The regions considered cover the 11 districts involved in the management of the Leuser Ecosystem. With a 4% discount rate, the accumulated TEV for the ecosystem over the 30-year period is: US $7.0 billion under the ‘deforestation scenario’, US $9.5 billion under the ‘conservation scenario’ and US $9.1 billion under the ‘selective utilisation scenario’. The main contributors in the conservation and selective use scenarios are water supply, flood prevention, tourism and agriculture. Timber revenues play an important role in the deforestation scenario. Compared to deforestation, conservation of the Leuser Ecosystem benefits all categories of stakeholders, except for the elite logging and plantation industry.     

The ‘flexible accelerator’ and optimization with a finite horizon

So-called ‘flexible accelerator’ or partial adjustment models can be derived from dynamic optimization under convex adjustment costs. However, even with time-invariant adjustment costs and constant discount rate, constancy of the speed of adjustment requires infinite horizon planning. Using a simple production model, it is shown here that for finite horizons, the adjustment may nevertheless be approximately constant for much of the time if the discount rate is high enough and if the marginal adjustment cost is sufficiently small.     

Ecological discounting

Which rates should we use to discount costs and benefits of different natures at different time horizons? We answer this question by considering a representative agent consuming two goods whose availability evolves over time in a stochastic way. We extend the Ramsey rule by taking into account the degree of substitutability between the two goods and of the uncertainty surrounding the economic and environmental growths. The rate at which environmental impacts should be discounted is in general different from the one at which monetary benefits should be discounted. We provide arguments in favor of an ecological discount rate smaller than the economic discount rate. In particular, we show that, under certainty and Cobb-Douglas preferences, the difference between the economic and the ecological discount rates equals the difference between the economic and the ecological growth rates. Using data about the link between biodiversity and economic development, I estimate that the rate at which changes in biodiversity should be discounted is 1.5%, whereas changes in consumption should be discounted at 3.2%.     

Social Discount Rates from Stratospheric Ozone Control*

We develop a model of optimal project timing to infer the discount rate US residents attach to investments in stratospheric ozone preservation. In this model, the calendar date at which preservation-related benefits offset costs is shown to be an increasing function of the real social rate of time preference. Estimates of US costs and benefits associated with the original (1987) Montreal Protocol are used to determine a range of discount rates from the US control of stratospheric ozone depletion. From this example the range is about 3.0 to 8.77 per cent.     

金融市场不完全的理论分解与测度研究——基于中国封闭式基金折价的动态考察

基于金融市场不完全的结构分解,文章构建了一个涵盖市场交易费用、套利定价机制不完备程度和行为金融学因素的封闭式基金折价机理模型,分阶段计量分析发现:(1)普通交易成本因素影响基金折价约6.1%;(2)2007年前股指期货缺位因素导致基金折价约25.6%,之后随着股指期货的正式推出该影响显著下降;(3)市场套利定价机制不完备程度测度表明,该因素影响基金平均折价三个阶段分别为8.26%、5.87%和7.91%;(4)时期固定效应表明,有5个季度因投资者情绪相对乐观而降低了基金的平均折价率。     

Land-use changes, forest/soil conditions and carbon sequestration dynamics: A bio-economic model at watershed level in Nepal

A dynamic bio-economic model has been used at watershed level in Nepal to analyze the land-use changes, forest and soil conditions and their resultant impacts on carbon (C) sequestration. Planning horizon of the model extends over a period of 25 years. The objective function is maximization of the sum of discounted net income flows from agriculture, livestock and forestry productions; imputed value of leisure and labour hiring out activities subject to annual constraints on land, labour and capital availability along with the fulfilment of minimum cash and consumption requirements. The seven scenarios analyzed by the model are: business as usual (BAU), reduction in population growth rate from 2 to 1.5% p.a., increased prices of major crops by 10 and 20%, reduction in emigration of active labour force from the watershed from the current rate of 20–15 and 10%, and increase in discount rate from 5 to 10%. The results indicate that reduced labour emigration rates and increase in the prices of major crops lead to expansion of cultivated area and shift from one land use to the others. Land clearing becomes more severe with decline in labour emigration rate. Up to 10% increase in the prices of agricultural crops does not have noticeable effect on total land clearing. Increase in discount rate leads to less land clearing, more biomass harvesting and higher net C sequestration as compared to the BAU scenario. Assuming a C price of 10 USD per MgC and 5% discount rate, the net present value of C sequestration for the first 25 years is estimated at 1.83 mill USD in the BAU scenario, varying from 0.16 mill USD to 2.26 mill USD, as respectively the lowest and highest values for the seven scenarios analysed. A reduction in population growth and maintenance of current rate of off-farm employment are suggested for slowing down the expansion of cultivated land area, and thereby reducing the forest/soil degradation and C emissions. This in turn would enhance the income potential from C sequestration.     

Repeated Experimentation to Learn About a Flow-Pollutant Threshold

We examine in discrete time the management of a flow pollutant that causes damage when it crosses a fixed but unknown threshold. The manager sequentially chooses a pollution level that allows learning about the threshold, thereby improving future decisions. If crossed, damage can be reversed at some cost. We analyze the conditions under which experimentation is optimal, and explore how experimentation depends on restoration costs, information about the threshold, and the discount rate. Our results suggest that the level of experimentation, defined as the difference between the optimal activity with and without learning, is non-monotonic in costs and decreasing in the discount rate. We identify two stopping boundaries for the experiment, depending on cost levels compared to the lower bound of the threshold’s interval. We show that when costs are high the stopping boundary under an infinite number of decisions is the same as when there are only two decision moments. A computational extension to more than two decisions suggests that an optimal sequence of experiments can cross the same threshold several times before experimentation ceases. These results shed light on a large class of environmental decision problems that has not been examined in the literature.     

Evaluating how predictable errors in expected income affect consumption

This article studies whether anomalies in consumption can be explained by a behavioural model in which agents make predictable errors in forecasting income. We use a micro-data set containing subjective expectations about future income. This article shows that the null hypothesis of rational expectations is rejected in favour of the behavioural model, since consumption responds to predictable forecast errors. On average, agents who we predict are too pessimistic increase consumption after the predictable positive income shock. On average, agents who are too optimistic reduce the consumption.     

Irreversibilities and the timing of environmental policy

The standard framework in which economists evaluate environmental policies is cost–benefit analysis, so policy debates usually focus on the expected flows of costs and benefits, or on the choice of discount rate. But this can be misleading when there is uncertainty over future outcomes, when there are irreversibilities, and when policy adoption can be delayed. This paper shows how two kinds of uncertainty — over the future costs and benefits of reduced environmental degradation, and over the evolution of an ecosystem — interact with two kinds of irreversibilities — sunk costs associated with an environmental regulation, and sunk benefits of avoided environmental degradation — to affect optimal policy timing and design.     

Exploring past and future changes in the ecological footprint for world regions

The Ecological Footprint (EF) has received considerable attention as a useful indicator in the context of sustainable development. So far, it has mostly been applied as a static indicator. Here, we have derived a set of long-term EF scenarios for 17 world regions using the IMAGE 2.2 implementation of the IPCCs SRES scenarios. The scenarios are used to discuss potential trends in EFs in different world regions but also to analyse underlying trends driving changes in the EF. The baseline scenarios show the EF for real land use only (not accounting for CO₂) to increase further in the next few decades in most world regions, being driven by population growth, changes in human diets towards more land-intensive products and overall increases in consumption levels. Future crop yield improvements and technology development will partly offset these trends, resulting in decreasing per capita EFs, but increasing total EFs. In the longer term, EF development may strongly diverge on the basis of assumptions made in the different baseline scenarios (from 5.4 Gha at present to 6.0–8.2 Gha in 2050 depending on the scenario). The aggregated EF following the definition of Wackernagel et al. (Proc. Natl. Acad. Sci. 99 (2002) 9266–9271) (including virtual land for CO₂) increases more strongly, from 12.6 to 20–31 Gha depending on the different scenarios. An alternative scenario was developed to explore whether optimistic assumptions for changes in consumption and production patterns could limit the increase of the global EF, which limited EF increase to 15 Gha in 2050. This scenario still allowed for population growth and strong economic development in low-income regions.     

A Behavioral Shift in Earnings Response After Regulation FD

The Regulation Fair Disclosure of 1999 (FD) intends to promote the full and fair disclosure of price information and further prevent insider trading. As a result, the public investors are expected to be empowered with more quality and relevant information. This study examines a behavioral shift in investor reaction to quarterly earnings announcements after the passage of the FD due to the expected improvement in information asymmetry. The empirical findings suggest that investors show a behavioral shift after the FD in response to biased earnings forecasts. Investors become more active in that they place a discount on optimistic earnings forecasts during the earnings announcement period. It is less obvious that they place a premium on pessimistic forecasts. Another coherent finding is that investors attempt to correct for the announcement-period mis-adjustments during the post-announcement period.     

Options and strategies for fiscal consolidation in India

This paper uses a multi-region dynamic stochastic general equilibrium (DSGE) model to study options and strategies for fiscal consolidation in India. The challenge for India is how to put public finances on a more sustainable footing while preserving the potential for high growth and attenuating the adverse consequences on the needy. We analyze the macroeconomic implications of three fiscal consolidation scenarios. A “benchmark” case based on authorities' intentions that reduces government consumption, general transfers, and strengthens consumption tax collection; a “growth-friendly” that reallocates the savings to more public investment; and a “social-friendly” scenario that equally reallocates the savings between more public investment and more transfers to households excluded from the financial system. The simulations indicate that fiscal consolidation yields considerable long-term benefits and also entails output costs in the near term. Growth outcomes are better under the growth-friendly and social-friendly scenarios. These consolidation scenarios alone are not enough to maximize net gains for India. Other factors, such as the pace of consolidation, the combination with structural reforms and external economic conditions, play a critical role in the success of fiscal consolidation.     

Cost-effectiveness of golimumab for the treatment of patients with moderate-to-severe ulcerative colitis in Quebec using a patient level state transition microsimulation

Objective: To conduct cost-effectiveness analyses comparing the addition of golimumab to the standard of care (SoC) for treatment of patients with moderate-to-severe ulcerative colitis (UC) who are refractory to conventional therapies in Quebec (Canada).

Methods: An individual patient state transition microsimulation model was developed to project health outcomes and costs over 10 years, using a payer perspective. The incremental benefit estimates for golimumab were driven by induction response and risk of a flare. Flare risks post-induction were derived for golimumab from the PURSUIT maintenance trial and extension study, while those for SoC were derived from the placebo arms of the Active Ulcerative Colitis Trials (ACT) 1 and 2. Other inputs were derived from multiple sources, including retrospective claims analyses and literature. Costs are reported in 2014 Canadian dollars. A 5% annual discount rate was applied to costs and quality-adjusted life-years (QALYs).

Results: Compared with SoC, golimumab was projected to increase the time spent in mild disease or remission states, decrease flare rates, and increase QALYs. These gains were achieved with higher direct medical costs. The incremental cost-effectiveness ratio for golimumab vs SoC was $63,487 per QALY.

Limitations: The long-term flare projections for SoC were based on the data available from the ACT 1 and 2 placebo arms, as data were not available from the PURSUIT maintenance or extension trial. Additionally, the study was limited to only SoC and golimumab, due to the availability of individual patient data to analyze.

Conclusion: This economic analysis concluded that treatment with golimumab is likely more cost-effective vs SoC when considering cost-effectiveness acceptability thresholds from $50,000–$100,000 per QALY.     

WELFARE LOSS OF WETLANDS DISINTEGRATION: A LOUISIANA STUDY

This study estimates the loss in welfare of projected Louisiana coastal wetlands disintegration. Various programs have initiated costly projects to terminate this disintegration process. But can these projects succeed, and will their benefits exceed their costs? This study addresses the benefits issues and estimates reductions in incomes and consumption opportunities and increases in costs that would be avoided if restoration and enhancement projects are successful. Estimated welfare losses that would be avoided do not include non-user and lifestyle losses, which may be very important, and they do not include the costs of dismantling coastal infrastructure. These exclusions make the estimates of this study minimum estimates of welfare losses. Future economic welfare losses represent a 1990 present value in a range between $5.9 and $24.3 billion, depending upon discount rates and whether low or high loss estimates are used. In order to make these estimates more meaningful, the implied wetlands values were calculated on a per acre basis. These values ranged from $8,437 to $15,763 per acre.     

COMPETITIVE PRICING AND EFFICIENCY IN SEARCH EQUILIBRIUM*

We consolidate and generalize some results on price determination and efficiency in search equilibrium. Extending models by Rubinstein and Wolinsky and by Gale, heterogeneous buyers and sellers meet according to a general matching technology and prices are determined by a general bargaining condition. When the discount rate r and search costs converge to 0, we show that prices in all exchanges are the same and equal the competitive, market clearing, price. Given positive search costs, efficiency obtains iff bargaining satisfies Hosios' condition and r=0. When prices are set by third‐party market makers, however, we show that search equilibrium is necessarily efficient.     

Economic Valuation of the Threat Posed by the Establishment of the Asian Tiger Mosquito in Australia

Invasive species policy could be better informed if we understood how much people value reductions in the risks posed by these organisms. This study investigates the public’s willingness to pay (WTP) for additional measures to reduce the risk of invasion of the Australian mainland by the Asian tiger mosquito (ATM). The study contributes to the literature by applying a stated preference method to estimate the public’s WTP to reduce the risk of an ATM invasion, expressed as a change in probability. It is the first ex ante invasive species analysis to test over two discrete invasion reduction probabilities based on management effort. Further, to overcome the challenges in valuing changes in probabilities, the study presented respondents with a well-defined discrete difference in the final probability, with one scenario reducing risk from 50 to 25% and the other from 50 to 5%. We find a significant difference in the mean WTP values between these two scenarios (A$67 vs. A$90). The overall conclusion is that estimated benefits of reducing the probability of an ATM incursion outweigh the costs.     

经济与生态效益不同情景下的广州市土地利用优化配置

缓解生态保护与经济发展之间的矛盾已成为广州市目前亟须解决的重要现实问题。通过对经济效益和生态效益最大化的不同侧重,基于多目标规划模型与CLUE-S模型对广州市2025年不同情景下的土地利用进行优化配置。结果表明:(1)与现状相比,兼顾两者效益情景的土地利用优化方案最为合理:效益提升最为协调分别为9.35%、9.58%,不同景观类型破碎化程度适中;(2)广州市对生态、经济效益的不同侧重主要导致林地、建设用地和水域面积的变化较大,未来规划应注重这三种地类的合理规划;(3)多目标规划与CLUE-S模型的结合,可以有效解决广州市多情景的土地资源优化配置模拟。研究结果对广州市土地利用可持续发展和生态文明建设具有较大的参考价值。     

Preferences for risk in dynamic models with adjustment costs

This paper characterizes the solution to a consumption/savings decision problem in which one of the consumption goods involves transaction costs. It then analyzes how such adjustment costs affect consumersʼ risk attitudes. Previous studies have suggested that transaction costs, by resulting in infrequent but lumpy adjustments, magnify consumersʼ risk aversion with respect to moderate-stake risk and, simultaneously, stimulate the demand for large-stake wealth lotteries. This paper argues that such predictions, while naturally arising in static models, may disappear or even reverse in a dynamic setting, in which consumers can choose when to make an adjustment. Namely, it shows that such an option can eliminate the demand for large-stake lotteries, and that the consumers choosing to delay the adjustment may be more tolerant to moderate-stake risks than in the absence of adjustment costs. The paper also illustrates that both predictions crucially depend on the relationship between the time discount rate in the utility function and the interest rate.     

COST-EFFECTIVENESS OF CONSERVATION PROGRAMS: THE HOOD RIVER EXPERIMENT

Economic cost-effectiveness analysis is a systematic approach to assessing benefits and costs associated with different actions. This analysis, as applied to energy conservation programs, is complicated greatly by the existence of intangible benefits and costs. A further complication occurs when the input values are uncertain. Such inputs include the useful lives of measures installed, the appropriate discount rate, and the expected levels of savings. This paper shows how one can incorporate input uncertainty and some intangibles into the cost-effectiveness analysis calculations. The Hood River Conservation Experiment provides the framework for analyzing these issues and serves as a pilot program for future conservation implementation.