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%.     

Consumer valuation of energy-saving features of residential air conditioners with hedonic and choice models

The promotion of energy-efficient appliances is necessary to reduce the energetic and environmental burden of the household sector. However, many studies have reported that a typical consumer underestimates the benefits of energy-saving investment on the purchase of household electric appliances. To analyze this energy-efficiency-gap problem, many scholars have estimated implicit discount rates that consumers use for energy-consuming durables. Although both hedonic and choice models have been used in previous studies, a comparison between the two models has not yet been made. This study uses point-of-sale data about Japanese residential air conditioners and estimates implicit discount rates with both hedonic and choice models. Both models demonstrate that a typical consumer underinvests in energy efficiency. Although choice models generally estimate a lower implicit discount rate than hedonic models, the latter models estimate the values of other product characteristics more consistently than choice models.     

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.     

Fishermen's Discount Rates in ITQ Systems

In this paper the fishermen's planning and investment horizon is investigated using their discount rates. It is shown that one might calculate the implicit discount rate in an ITQ regulated fishery from the available information from the quota market. This gives information about how well the system is working. In particular, discount rates where ITQ systems are in operation initially were very high, before they started to decrease. This implies that it take some time to reap the full benefits of an ITQ system. It also gives arguments for not letting ITQs be perpetual property rights, and hence, enables more flexibility in the management system.     

Individual discount rates forecast county-level unemployment change

We use a national survey to estimate individuals’ discount rates for job creation in the community and test whether impatience for jobs is associated county-level unemployment change outcomes in subsequent years. Our results suggest that impatience for jobs is a possible forecast variable for future modelling efforts. To explore whether the impatience effect is general or simply limited to attitudes about local job creation, the same survey asked about discount rates for local amenity development and personal financial windfall. We find that job growth discount rates perform best for forecasting.     

DETERMINANTS AND EFFECTS ON PROPERTY VALUES OF PARTICIPATION IN VOLUNTARY CLEANUP PROGRAMS: THE CASE OF COLORADO

State voluntary cleanup programs (VCPs) were established in the 1990s to encourage cleanup and redevelopment of contaminated properties. I ask three questions: First, what properties are attracted to VCPs? Second, is there an interaction between VCP incentives and enterprise or brownfield zone incentives? Third, does participation in VCPs affect property values? Data from Colorado’s VCP suggest that (a) the main determinants of participation are the size of the parcel and the surrounding land use, (b) other incentives have little effect, (c) properties with confirmed contamination sell at a 43%–56% discount, and (d) participation does tend to raise the property price. (JEL R14, Q58, K32)     

A cost-benefit analysis of female primary education as a means of reducing HIV/AIDS in Tanzania

This article, uses panel data related to 20 Tanzania regions and 8 years to estimate the direct and indirect effects of female primary education on HIV/AIDS rates. A recursive framework for education, income and infections is employed, based on two autoregressive equations that allow us to obtain dynamic estimates of effectiveness. We find that the indirect effect working through changes in income outweighs the direct positive effect of education on infections, implying that female education can be effective as an intervention to lower the disease in Tanzania. The estimates of effectiveness are then utilized to carry out a cost-benefit analysis of the education expenditures. The human capital approach is used to measure the benefits. Irrespective of the timing of the benefits and costs, and the discount rate alternatives we consider, our best estimates result in positive net-benefits, with benefit-cost ratios in the range 1.3–2.9.     

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.     

Banking,incentive constraints,and demand deposit contracts with nonlinear returns

Summary This paper presents two results regarding banking theory: (1) demand deposit contracts are essential in providing insurance against preferences shocks, as in Diamond and Dybvig (1983), if and only if the incentive compatibility conditions bind at the social optimum; and (2) for additively separable preferences with random discount factors, demand deposit contracts have the realistic feature that the interest rate paid is an increasing function of deposit balance.This paper is based on Chapter 2 of my Ph.D. dissertation submitted to the Graduate School of The University of Minnesota. I am indebted to Neil Wallace for his advice and guidance. I thank an anonymous refree for comments on a previous version of the paper. The comments from Edward Green, Nobuhiro Kiyotaki, Antonio Merlo, and Arijit Mukherji are appreciated.     

Mean-reversion in closed-end fund discount: evidence from half-life

This article examines the mean-reversion properties of the discount on UK and US closed-end funds. While the discounts are tested I(1), strong statistical evidence of mean-reversion is ascertained by bias-corrected bootstrap half-life estimates. The estimates also indicate that equity-based funds converge to the steady-state level faster than fixed income funds. In addition, although an equilibrium pricing condition postulates an inverse relation between half-life and the discount size, correlation estimates fail to show strong support for the relation.     

Joint estimation of discount rates and willingness to pay for public goods

We analyze willingness to pay (WTP) for environmental programs whose time periods of benefit and repayment differ, using a net present value framework that identifies parameters of both WTP and personal discount rates. Respondents to a contingent valuation survey focusing on protection of critical habitat buffer zones for the endangered Steller Sea Lion in Alaska were asked their willingness to pay for 1-, 5-, and 15-year repayment periods. We jointly estimate the personal discount rates and WTP via maximum likelihood, and compare with a model assuming a fixed, market discount rate.     

Managing wetlands: an ecological economic analysis of the Hong Kong Wetland Park

This paper addresses the question of whether the Hang Kong government made a rational economic decision when it decided to set aside land to develop a Wetland Park, or whether it should have used the land for alternative commercial developments. Different analytical methods are used to estimate the economic value of the environmental benefits of the Wetland Park： the Value Transfer Method is used to estimate the economic value oJ the ecological services provided by the Park. the Direct Market Price analysis for the economic value of the goods purchased in the Wetland Park, the Hedonic Housing Price Analysis for the value of the Park to those residing in its proximity, the Travel Cost and Contingent Valuation Method for the value of the Park to the visitors, and the Contingent Valuation for the Passive （Nonuse） Values of the Park. These benefits are compared to the opportunity cost of the land and the cost of running the Wetland Park. The article concludes that if a rate of 5% or less is used to discount fiture costs and benefits, we would find that the government＇s decision to set aside land for a Wetland Park was economically sound while using a discount rate of 6% or more shows that it was not.     

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.     

Alternating-Offer Bargaining with Two-Sided Incomplete Information

I study alternating-offer bargaining games with two-sided incomplete information about the players' discount rates. For both perfect Bayesian equilibrium and a rationalizability-style notion, I characterize the set of expected payoffs which may arise in the game. I also construct bounds on agreements that may be made. The set of expected payoffs is easy to compute and incorporate into applied models. My main result is a full characterization of the set of perfect Bayesian equilibrium payoffs for games in which the distribution over the players' discount rates is of wide support, yet is in a weak sense close to a point mass distribution. I prove a lopsided convergence result: each player cannot gain from a slight chance that she is a strong type, but the player can suffer greatly if there is a slight chance that she is a weak type.     

The social security early entitlement age in a structural model of retirement and wealth

A structural life cycle model of retirement and wealth attributes retirement peaks at both ages 62 and 65 to Social Security rules and wide heterogeneity in time preferences. Those with high discount rates often retire at 62. They have few assets and heavily value lost benefits from working after 62, largely ignoring potential increases in later benefits. Declining actuarial adjustments beginning at 65 induce those with low discount rates to retire at 65. Raising the Social Security early entitlement age to 64 induces 5% of the population to delay retiring, shifting the retirement spike from 62 to 64.     

Convex Time Budgets and Individual Discount Rates in the Long Run

The purpose of this study is to use experimental data to estimate individual discount rates and test for hyperbolic discounting over a long time horizon. To do this, we employ the convex time budget experimental approach with cash payments over a 20 year time horizon. To date, there are few experimental studies that explore discount rates beyond a 1 year time horizon. Previous experimental studies that focus on short time horizons find high discount rates, which may not be applicable to decisions that affect outcomes in the distant future. Our findings are quite similar to the average rate of 4.9% found by Grijalva et al. (Environ Resour Econ 59:39–63, 2014), who similarly use a 20 year time horizon, but use the multiple price list elicitation method along with payment via government savings bonds. We find annual discounts rates in the range of 1.9–5.5%, depending on the specific model used. We also find evidence for declining discount rates, and that this hyperbolic pattern of behavior is related to the confidence subjects have in receiving distant-future payments.     

Patience auctions: the impact of time vs. money bidding on elicited discount rates

We introduce, test, and compare two auction-based methods for eliciting discount rates. In these “patience auctions”, participants bid the smallest future sum they would prefer -or- the longest time they would wait for a reward, rather than receive a smaller, immediate payoff. The most patient bidder receives the delayed reward; all others receive the immediate payoff. These auctions allow us to compare discounting when participants’ attention is focused on the temporal versus monetary dimension of delayed rewards. We find that the estimated parameters in the three most commonly used discount functions (exponential, hyperbolic, and quasi-hyperbolic) differ across these two bidding methods (time-bids vs. money-bids). Specifically, our participants tend to show more impatience under time-bids. Furthermore, we find that people are more likely to exhibit exponential (as opposed to hyperbolic) discounting and exhibit less present bias under time-bids, compared to money-bids. To our knowledge, this paper is the first to directly compare time versus money preference elicitations, within the same subjects, using an incentive-compatible mechanism.     

Empirical and public choice evidence for hyperbolic social discount rates and the implications for intergenerational discounting

The derivation of the correct discount rate for intergenerational projects in Cost Benefit Analysis is particularly contentious. Public choice has resulted in lower discretionary exponential discount rates for many intergenerational projects in Britain and the USA. This is shown to be strong indirect evidence that the true social discount rate may be a hyperbolic (rather than an exponential) function. There is also empirical evidence for this hypothesis. The hyperbolic nature of discounting is also a standard finding in the behavioural sciences. For intergenerational time frames hyperbolic discount rates should be employed together with exponential discount rates in cost-benefit sensitivity analyses.Sincere thanks to Maureen Cropper and Paul Portney for supplying their survey results and to Elaine Barrow and Phillip Judge for graphics assistance. Two anonymous referees also provided valuable comments.     

Forward Discount Bias: Is it Near-Rationality in the Foreign Exchange Market?*

A risk-averse US investor adjusts the shares of a portfolio of short-term nominal domestic and foreign assets to maximize expected utility. The optimal strategy is to respond immediately to all new information which arrives weekly. We develop a model to estimate the cost of optimizing less frequently and find that it is generally very small. For example, if the investor adjusts portfolio shares every three months, an average expected utility loss of 0.16 per cent p.a. is incurred. Hence, slight opportunity costs of frequent optimization may outweigh the benefits. This result may help explain forward discount bias.     

A time preference measure of the social discount rate for the UK

In this study the social discount rate for the UK is estimated, the result compared with the Treasury approved rate and the main associated policy implications considered. A case is argued for reducing the official discount rate in appraisals involving all long-term social projects. The estimate of the elasticity of the marginal utility of consumption, an important component of the discount rate, is supported by plausible and statistically valid regression results. The need for further work relating to other major european countries is identified so that discount rate comparisons can be made on a consistent basis.