Chris Jones
- Published in print:
- 2005
- Published Online:
- July 2005
- ISBN:
- 9780199281978
- eISBN:
- 9780191602535
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199281971.001.0001
- Subject:
- Economics and Finance, Public and Welfare
Important results in the applied welfare literature are used to extend a conventional Harberger cost-benefit analysis. A conventional welfare equation is obtained for marginal policy changes in a ...
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Important results in the applied welfare literature are used to extend a conventional Harberger cost-benefit analysis. A conventional welfare equation is obtained for marginal policy changes in a general equilibrium economy with tax distortions. It is extended to accommodate internationally traded goods, time, income taxes, and non-tax distortions, including externalities, non-competitive behaviour, public goods, and price-quantity controls. The welfare analysis is developed in stages, and where possible is explained using diagrams, to make it more amenable to the different institutional arrangements encountered in applied work. Computable welfare expressions are solved using demand-supply elasticities. In a conventional cost-benefit analysis, lump sum transfers are used to separate the welfare effects of individual policy variables. This is important because it allows policy evaluation to be divided across specialist agencies. These transfers are carefully examined to identify the important role played by the marginal social cost of public funds (MCF) in policy evaluation when governments balance their budgets with distorting taxes. This book separates income effects for marginal policy changes in the shadow value of government revenue. As a scaling coefficient that converts efficiency effects into dollar changes in private surplus, it makes income effects irrelevant in single (aggregated) consumer economies, and conveniently isolates distributional effects in heterogeneous consumer economies. This decomposition is used to test for Pareto improvements, and to examine the separate, but related roles of the shadow value of government revenue and the MCF in applied work.Less
Important results in the applied welfare literature are used to extend a conventional Harberger cost-benefit analysis. A conventional welfare equation is obtained for marginal policy changes in a general equilibrium economy with tax distortions. It is extended to accommodate internationally traded goods, time, income taxes, and non-tax distortions, including externalities, non-competitive behaviour, public goods, and price-quantity controls. The welfare analysis is developed in stages, and where possible is explained using diagrams, to make it more amenable to the different institutional arrangements encountered in applied work. Computable welfare expressions are solved using demand-supply elasticities. In a conventional cost-benefit analysis, lump sum transfers are used to separate the welfare effects of individual policy variables. This is important because it allows policy evaluation to be divided across specialist agencies. These transfers are carefully examined to identify the important role played by the marginal social cost of public funds (MCF) in policy evaluation when governments balance their budgets with distorting taxes. This book separates income effects for marginal policy changes in the shadow value of government revenue. As a scaling coefficient that converts efficiency effects into dollar changes in private surplus, it makes income effects irrelevant in single (aggregated) consumer economies, and conveniently isolates distributional effects in heterogeneous consumer economies. This decomposition is used to test for Pareto improvements, and to examine the separate, but related roles of the shadow value of government revenue and the MCF in applied work.
George J. Mailath and Larry Samuelson
- Published in print:
- 2006
- Published Online:
- January 2007
- ISBN:
- 9780195300796
- eISBN:
- 9780199783700
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195300796.003.0004
- Subject:
- Economics and Finance, Behavioural Economics
This chapter explores the meaning and interpretation of an infinitely repeated game. It examines finitely repeated games and infinitely repeated games with declining discount factors, and the ...
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This chapter explores the meaning and interpretation of an infinitely repeated game. It examines finitely repeated games and infinitely repeated games with declining discount factors, and the implications of refining the notion of subgame perfection to require renegotiation proofness.Less
This chapter explores the meaning and interpretation of an infinitely repeated game. It examines finitely repeated games and infinitely repeated games with declining discount factors, and the implications of refining the notion of subgame perfection to require renegotiation proofness.
M. Barton Waring
- Published in print:
- 2009
- Published Online:
- February 2010
- ISBN:
- 9780199573349
- eISBN:
- 9780191721946
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199573349.003.0004
- Subject:
- Business and Management, Public Management, Pensions and Pension Management
Unless defined benefit pension plans are managed much better and more cost-effectively, they will be replaced by defined contribution plans. Benefit and contribution policies need to be carefully ...
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Unless defined benefit pension plans are managed much better and more cost-effectively, they will be replaced by defined contribution plans. Benefit and contribution policies need to be carefully evaluated to make sure that a reasonable level of ongoing contributions, together with investment income, are adequate to fund the defined benefit plan without unpleasant surprises. Unless valuation and contribution conventions change to market-valued economically based quantities, decision makers will lack the right information with which to make informed policy decisions.Less
Unless defined benefit pension plans are managed much better and more cost-effectively, they will be replaced by defined contribution plans. Benefit and contribution policies need to be carefully evaluated to make sure that a reasonable level of ongoing contributions, together with investment income, are adequate to fund the defined benefit plan without unpleasant surprises. Unless valuation and contribution conventions change to market-valued economically based quantities, decision makers will lack the right information with which to make informed policy decisions.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0015
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This concluding chapter summarizes the principles set forth in this volume. It argues that the discount rate is a key parameter in economics because it determines how our societies value their ...
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This concluding chapter summarizes the principles set forth in this volume. It argues that the discount rate is a key parameter in economics because it determines how our societies value their future. The chapter aims to use the discount rate in the net present value (NPV) decision rule: to find the discount rate which gives a positive NPV only for those projects that raise the sum of present and future generations’ felicity. In that light, this chapter briefly touches upon the basic principles of discounting, the discounting of safe real cash flows, the term structure of real discount rates, the evaluation of uncertain projects, and the adaptability of projects.Less
This concluding chapter summarizes the principles set forth in this volume. It argues that the discount rate is a key parameter in economics because it determines how our societies value their future. The chapter aims to use the discount rate in the net present value (NPV) decision rule: to find the discount rate which gives a positive NPV only for those projects that raise the sum of present and future generations’ felicity. In that light, this chapter briefly touches upon the basic principles of discounting, the discounting of safe real cash flows, the term structure of real discount rates, the evaluation of uncertain projects, and the adaptability of projects.
Sharan Jagpal
- Published in print:
- 2008
- Published Online:
- September 2008
- ISBN:
- 9780195371055
- eISBN:
- 9780199870745
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195371055.003.0020
- Subject:
- Business and Management, Marketing
This chapter analyzes how the firm's marketing strategies affect consumers and society. The topics covered include the effects of: the firm's pricing policy for durables; volume-based pricing (e.g., ...
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This chapter analyzes how the firm's marketing strategies affect consumers and society. The topics covered include the effects of: the firm's pricing policy for durables; volume-based pricing (e.g., quantity discounts); the distribution of free samples; cost dynamics; demand dynamics; informative, persuasive, and mixed advertising; the product life cycle; bundling innovative and commoditized products; mixed bundling plans; sequential new product introduction over time; and secondhand markets for durables. In particular, it shows how the combined effect of the firm's marketing and finance strategies affect consumer well-being and social welfare.Less
This chapter analyzes how the firm's marketing strategies affect consumers and society. The topics covered include the effects of: the firm's pricing policy for durables; volume-based pricing (e.g., quantity discounts); the distribution of free samples; cost dynamics; demand dynamics; informative, persuasive, and mixed advertising; the product life cycle; bundling innovative and commoditized products; mixed bundling plans; sequential new product introduction over time; and secondhand markets for durables. In particular, it shows how the combined effect of the firm's marketing and finance strategies affect consumer well-being and social welfare.
Sharan Jagpal
- Published in print:
- 2008
- Published Online:
- September 2008
- ISBN:
- 9780195371055
- eISBN:
- 9780199870745
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195371055.003.0005
- Subject:
- Business and Management, Marketing
This chapter examines the conditions under which the multiproduct firm should use market share as a metric for resource allocation. It distinguishes short- and long-run effects, analyze the effects ...
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This chapter examines the conditions under which the multiproduct firm should use market share as a metric for resource allocation. It distinguishes short- and long-run effects, analyze the effects of competition, and show how the discount rate affects the firm's revenue- and volume-based market shares. In particular, it shows how the firm can use marketing-finance fusion to choose the optimal performance metrics for managers so that they focus on maximizing long-run performance.Less
This chapter examines the conditions under which the multiproduct firm should use market share as a metric for resource allocation. It distinguishes short- and long-run effects, analyze the effects of competition, and show how the discount rate affects the firm's revenue- and volume-based market shares. In particular, it shows how the firm can use marketing-finance fusion to choose the optimal performance metrics for managers so that they focus on maximizing long-run performance.
Stephen T. McElhaney
- Published in print:
- 2009
- Published Online:
- February 2010
- ISBN:
- 9780199573349
- eISBN:
- 9780191721946
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199573349.003.0002
- Subject:
- Business and Management, Public Management, Pensions and Pension Management
Liabilities for pension and retiree health-care benefits provided by US state and local governments are causing concerns for taxpayers and for those holding government bonds. Many question whether ...
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Liabilities for pension and retiree health-care benefits provided by US state and local governments are causing concerns for taxpayers and for those holding government bonds. Many question whether the methodology used to calculate these liabilities is appropriate, since the private sector calculates retirement system liabilities using different methods and assumptions. This chapter reviews and critiques current actuarial and accounting standards under which governmental retiree liabilities are calculated and compares and contrasts these standards to those used by private sector employers.Less
Liabilities for pension and retiree health-care benefits provided by US state and local governments are causing concerns for taxpayers and for those holding government bonds. Many question whether the methodology used to calculate these liabilities is appropriate, since the private sector calculates retirement system liabilities using different methods and assumptions. This chapter reviews and critiques current actuarial and accounting standards under which governmental retiree liabilities are calculated and compares and contrasts these standards to those used by private sector employers.
Raimond Maurer, Olivia S. Mitchell, and Ralph Rogalla
- Published in print:
- 2009
- Published Online:
- February 2010
- ISBN:
- 9780199573349
- eISBN:
- 9780191721946
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199573349.003.0009
- Subject:
- Business and Management, Public Management, Pensions and Pension Management
This chapter analyzes the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for civil servants in Germany, allowing for alternative portfolio mixes using a ...
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This chapter analyzes the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for civil servants in Germany, allowing for alternative portfolio mixes using a Monte Carlo framework and a Conditional Value at Risk metric. The authors identify an investment strategy for plan assets that will minimize worst-case pension costs; this turns out to be 22 percent in equities, 47 percent in bonds, and 31 percent in real estate. The authors show that moving toward a funded pension system for German civil servants can be beneficial to both taxpayers and civil servants.Less
This chapter analyzes the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for civil servants in Germany, allowing for alternative portfolio mixes using a Monte Carlo framework and a Conditional Value at Risk metric. The authors identify an investment strategy for plan assets that will minimize worst-case pension costs; this turns out to be 22 percent in equities, 47 percent in bonds, and 31 percent in real estate. The authors show that moving toward a funded pension system for German civil servants can be beneficial to both taxpayers and civil servants.
Joseph Heath
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195370294
- eISBN:
- 9780199871230
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195370294.003.0009
- Subject:
- Philosophy, Logic/Philosophy of Mathematics
The argument of the previous chapter suggests that, in general, people act in the way that they have best reason to act. This constitutes a tacit denial of the view that there is such a thing as ...
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The argument of the previous chapter suggests that, in general, people act in the way that they have best reason to act. This constitutes a tacit denial of the view that there is such a thing as intentional counterpreferential choice. The argument of this chapter makes this denial more plausible, by drawing out the philosophical implications of the phenomenon of hyperbolic discounting. The philosophical literature on weakness of will is marred by a failure to render explicit any assumptions that may be being made about individual time-preference. Incorporating an explicit discount rate resolves many of these issues, but also shows how many of the phenomena traditional classified as weakness of will can easily be given a rationalizing explanation, as temporary preference reversals.Less
The argument of the previous chapter suggests that, in general, people act in the way that they have best reason to act. This constitutes a tacit denial of the view that there is such a thing as intentional counterpreferential choice. The argument of this chapter makes this denial more plausible, by drawing out the philosophical implications of the phenomenon of hyperbolic discounting. The philosophical literature on weakness of will is marred by a failure to render explicit any assumptions that may be being made about individual time-preference. Incorporating an explicit discount rate resolves many of these issues, but also shows how many of the phenomena traditional classified as weakness of will can easily be given a rationalizing explanation, as temporary preference reversals.
Howard Rachlin
- Published in print:
- 2010
- Published Online:
- May 2010
- ISBN:
- 9780195391381
- eISBN:
- 9780199776894
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195391381.003.0027
- Subject:
- Psychology, Cognitive Neuroscience, Social Psychology
Problems of self-control as well as social cooperation may be seen as conflicts not between internal spiritual or neurological entities, but between highly valued overt behavioral patterns of ...
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Problems of self-control as well as social cooperation may be seen as conflicts not between internal spiritual or neurological entities, but between highly valued overt behavioral patterns of differing temporal extents or social distances. For example, an alcoholic must choose between having a drink now—valuable in the short run—and being healthy, performing well at work, maintaining satisfying social relationships, etc. —valuable in the long run. The essential question addressed in this chapter is how the latter may come to dominate the former within a person's lifetime. A behavioral evolutionary process is proposed by which valuable temporally or socially extended behavior patterns evolve over an individual lifetime from simpler, shorter patterns. It is argued that complex patterns, such as social cooperation over long periods, arise from simpler patterns in behavioral evolution analogously to the way complex structures, such as the human eye, arise from simpler structures in biological evolution. The idea that complex, long-term behavioral patterns in conflict with short-term patterns, if they are not inherited in toto, must be generated by an internal and autonomous spiritual, neurological, or cognitive process is compared to creationism in biological evolution. The role of delay and social discount functions in measuring the extent of coherent behavioral patterns is explicated. Finally, the chapter examines several implications of teleological behaviorism for practical behavioral control.Less
Problems of self-control as well as social cooperation may be seen as conflicts not between internal spiritual or neurological entities, but between highly valued overt behavioral patterns of differing temporal extents or social distances. For example, an alcoholic must choose between having a drink now—valuable in the short run—and being healthy, performing well at work, maintaining satisfying social relationships, etc. —valuable in the long run. The essential question addressed in this chapter is how the latter may come to dominate the former within a person's lifetime. A behavioral evolutionary process is proposed by which valuable temporally or socially extended behavior patterns evolve over an individual lifetime from simpler, shorter patterns. It is argued that complex patterns, such as social cooperation over long periods, arise from simpler patterns in behavioral evolution analogously to the way complex structures, such as the human eye, arise from simpler structures in biological evolution. The idea that complex, long-term behavioral patterns in conflict with short-term patterns, if they are not inherited in toto, must be generated by an internal and autonomous spiritual, neurological, or cognitive process is compared to creationism in biological evolution. The role of delay and social discount functions in measuring the extent of coherent behavioral patterns is explicated. Finally, the chapter examines several implications of teleological behaviorism for practical behavioral control.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0014
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter shows that the cost-benefit analysis can be used only if the actions under scrutiny are marginal, that is, if implementing them has no macroeconomic effects. Otherwise, one needs to go ...
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This chapter shows that the cost-benefit analysis can be used only if the actions under scrutiny are marginal, that is, if implementing them has no macroeconomic effects. Otherwise, one needs to go back to the basics of public economics to evaluate these actions. The chapter examines the error that one makes by following the classical discounting approach when evaluating non-marginal projects. The evaluation of non-marginal projects must be done by measuring their impact on the social welfare function. A non-marginal investment project with positive future cash flows will have an impact on welfare that is smaller than when estimated by using the standard discounting method.Less
This chapter shows that the cost-benefit analysis can be used only if the actions under scrutiny are marginal, that is, if implementing them has no macroeconomic effects. Otherwise, one needs to go back to the basics of public economics to evaluate these actions. The chapter examines the error that one makes by following the classical discounting approach when evaluating non-marginal projects. The evaluation of non-marginal projects must be done by measuring their impact on the social welfare function. A non-marginal investment project with positive future cash flows will have an impact on welfare that is smaller than when estimated by using the standard discounting method.
John P. Burkett
- Published in print:
- 2006
- Published Online:
- October 2011
- ISBN:
- 9780195189629
- eISBN:
- 9780199850778
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195189629.003.0018
- Subject:
- Economics and Finance, Microeconomics
This chapter discusses the microeconomic concept of inconsistent intertemporal choice. It explains the intertemporal preferences are consistent if plans made at one moment are still attractive at all ...
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This chapter discusses the microeconomic concept of inconsistent intertemporal choice. It explains the intertemporal preferences are consistent if plans made at one moment are still attractive at all subsequent moments and they are inconsistent if the mere passage of time makes individuals regret or abandon their previously adopted plans. Experimental evidence indicates that for many individuals discounting is not exponential but hyperbolic and hyperbolic discounting can result in inconsistent choices. This chapter provides several relevant computational exercises and solutions.Less
This chapter discusses the microeconomic concept of inconsistent intertemporal choice. It explains the intertemporal preferences are consistent if plans made at one moment are still attractive at all subsequent moments and they are inconsistent if the mere passage of time makes individuals regret or abandon their previously adopted plans. Experimental evidence indicates that for many individuals discounting is not exponential but hyperbolic and hyperbolic discounting can result in inconsistent choices. This chapter provides several relevant computational exercises and solutions.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0002
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter presents the main argument in favor of a positive discount rate. In a growing economy, future generations will consume more goods and services than we do. In this context, investing for ...
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This chapter presents the main argument in favor of a positive discount rate. In a growing economy, future generations will consume more goods and services than we do. In this context, investing for the future is equivalent to asking poor consumers to sacrifice more of their consumption for the benefit for wealthier people. Because of inequality aversion, one would be ready to do so only if the rate of return of these investment projects is large enough to compensate for the increased intertemporal inequalities that these projects would generate. The Ramsey rule quantifies this wealth effect. In fact, several experts have used the Ramsey rule to make recommendations on the choice of the discount rate to evaluate public policies, in particular toward climate change.Less
This chapter presents the main argument in favor of a positive discount rate. In a growing economy, future generations will consume more goods and services than we do. In this context, investing for the future is equivalent to asking poor consumers to sacrifice more of their consumption for the benefit for wealthier people. Because of inequality aversion, one would be ready to do so only if the rate of return of these investment projects is large enough to compensate for the increased intertemporal inequalities that these projects would generate. The Ramsey rule quantifies this wealth effect. In fact, several experts have used the Ramsey rule to make recommendations on the choice of the discount rate to evaluate public policies, in particular toward climate change.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0004
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter illustrates that the shape of the term structure of discount rates is determined by the way the wealth effect and the precautionary effects evolve with the time horizon. When the growth ...
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This chapter illustrates that the shape of the term structure of discount rates is determined by the way the wealth effect and the precautionary effects evolve with the time horizon. When the growth rate of consumption is constant, then consumption increases exponentially, and the intertemporal rate of substitution, which is the discount factor, decreases exponentially. This requires that the discount rate is constant. The simplest extension of this to uncertainty is to assume that the growth rate of the economy follows a random walk. In that case, the variance of log consumption increases linearly, which yields an exponentially increasing precautionary effect for the discount factor. This justifies a constant precautionary effect on the discount rate, yielding a crucial result for the theory of efficient discount rates.Less
This chapter illustrates that the shape of the term structure of discount rates is determined by the way the wealth effect and the precautionary effects evolve with the time horizon. When the growth rate of consumption is constant, then consumption increases exponentially, and the intertemporal rate of substitution, which is the discount factor, decreases exponentially. This requires that the discount rate is constant. The simplest extension of this to uncertainty is to assume that the growth rate of the economy follows a random walk. In that case, the variance of log consumption increases linearly, which yields an exponentially increasing precautionary effect for the discount factor. This justifies a constant precautionary effect on the discount rate, yielding a crucial result for the theory of efficient discount rates.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0005
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter examines the effects of a dramatic switch in the dynamics of economic growth for the term structure of the discount rate over the longer term. Economies undergo radical transformations. ...
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This chapter examines the effects of a dramatic switch in the dynamics of economic growth for the term structure of the discount rate over the longer term. Economies undergo radical transformations. One such radical transformation was called the “industrial revolution” which has had a long-lasting effect on economic growth. The chapter considers the possibility of a reversion to the pre-industrial age, at least in terms of an absence of growth, in the distant future, or any other effects on the current economic growth rate. Other less persistent—but more frequent—transformations observed in the past were wars or great economic depressions. It is thus important to include the possibility of such changes in the dynamics of growth in the analysis of the term structure of the discount rate.Less
This chapter examines the effects of a dramatic switch in the dynamics of economic growth for the term structure of the discount rate over the longer term. Economies undergo radical transformations. One such radical transformation was called the “industrial revolution” which has had a long-lasting effect on economic growth. The chapter considers the possibility of a reversion to the pre-industrial age, at least in terms of an absence of growth, in the distant future, or any other effects on the current economic growth rate. Other less persistent—but more frequent—transformations observed in the past were wars or great economic depressions. It is thus important to include the possibility of such changes in the dynamics of growth in the analysis of the term structure of the discount rate.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0007
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter examines a model in which the exogeneous rate of return of capital is constant but random. Safe investment projects must be evaluated and implemented before this uncertainty can be fully ...
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This chapter examines a model in which the exogeneous rate of return of capital is constant but random. Safe investment projects must be evaluated and implemented before this uncertainty can be fully revealed, i.e., before knowing the opportunity cost of capital. A simple rule of thumb in this context would be to compute the net present value (NPV) for each possible discount rate, and to implement the project if the expected NPV is positive. If the evaluator uses this approach, this is as if one would discount cash flows at a rate that is decreasing with maturity. This approach is implicitly based on the assumptions that the stakeholders are risk-neutral and transfer the net benefits of the project to an increase in immediate consumption. Opposite results prevail if one assumes that the net benefit is consumed at the maturity of the project.Less
This chapter examines a model in which the exogeneous rate of return of capital is constant but random. Safe investment projects must be evaluated and implemented before this uncertainty can be fully revealed, i.e., before knowing the opportunity cost of capital. A simple rule of thumb in this context would be to compute the net present value (NPV) for each possible discount rate, and to implement the project if the expected NPV is positive. If the evaluator uses this approach, this is as if one would discount cash flows at a rate that is decreasing with maturity. This approach is implicitly based on the assumptions that the stakeholders are risk-neutral and transfer the net benefits of the project to an increase in immediate consumption. Opposite results prevail if one assumes that the net benefit is consumed at the maturity of the project.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0010
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter addresses issues regarding the use of cost-benefit analyses in shaping environmental policies. It defines an ecological discount rate compatible with social welfare when the ...
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This chapter addresses issues regarding the use of cost-benefit analyses in shaping environmental policies. It defines an ecological discount rate compatible with social welfare when the representative agent cares about both the economic and ecological environments faced by future generations. This ecological rate at which future environmental damages are discounted may be much smaller than the economic rate at which economic damages are discounted, because of the integration of a potentially increasing willingness to pay for the environment into the ecological discount rate. This increased interest in environmental assets is modeled in this chapter by the potential for increased scarcity of these assets, which drives their value upward through time. The chapter shows that the uncertainties surrounding the future evolution of environmental quality and the economy tend to reduce the discount rates, in particular if they are positively correlated.Less
This chapter addresses issues regarding the use of cost-benefit analyses in shaping environmental policies. It defines an ecological discount rate compatible with social welfare when the representative agent cares about both the economic and ecological environments faced by future generations. This ecological rate at which future environmental damages are discounted may be much smaller than the economic rate at which economic damages are discounted, because of the integration of a potentially increasing willingness to pay for the environment into the ecological discount rate. This increased interest in environmental assets is modeled in this chapter by the potential for increased scarcity of these assets, which drives their value upward through time. The chapter shows that the uncertainties surrounding the future evolution of environmental quality and the economy tend to reduce the discount rates, in particular if they are positively correlated.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0011
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter describes a sample of the alternative decision criteria that have features which are normatively attractive. A standard critique made to the discounted expected utility (DEU) model that ...
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This chapter describes a sample of the alternative decision criteria that have features which are normatively attractive. A standard critique made to the discounted expected utility (DEU) model that has been used in this volume is that the concavity of the utility function expresses at the same time the aversion to inequalities and the aversion to risk. Moreover, it does not take into account the possibility of an aversion to ambiguity on probabilities, or the formation of consumption habits. Such issues imply that the DEU model is not very good for explaining, or predicting, actual behaviors under uncertainty. However, as this book aims for normative rather than positive arguments, this chapter focuses not on what people actually do, but instead on determining what they should do.Less
This chapter describes a sample of the alternative decision criteria that have features which are normatively attractive. A standard critique made to the discounted expected utility (DEU) model that has been used in this volume is that the concavity of the utility function expresses at the same time the aversion to inequalities and the aversion to risk. Moreover, it does not take into account the possibility of an aversion to ambiguity on probabilities, or the formation of consumption habits. Such issues imply that the DEU model is not very good for explaining, or predicting, actual behaviors under uncertainty. However, as this book aims for normative rather than positive arguments, this chapter focuses not on what people actually do, but instead on determining what they should do.
Robert W. Hahn and Alistair Ulph (eds)
- Published in print:
- 2012
- Published Online:
- May 2012
- ISBN:
- 9780199692873
- eISBN:
- 9780191738371
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199692873.001.0001
- Subject:
- Economics and Finance, Development, Growth, and Environmental
There is widespread agreement that climate change is a serious problem. If we fail to regulate greenhouse gases that contribute to global warming, or use alternative strategies for addressing the ...
More
There is widespread agreement that climate change is a serious problem. If we fail to regulate greenhouse gases that contribute to global warming, or use alternative strategies for addressing the problem, the damages could be significant, and perhaps catastrophic. After several international meetings in which nation states have tried unsuccessfully to address the climate change problem, there is a widespread sense of frustration and urgency: frustration at the slow pace at which countries are moving toward an international agreement to reduce greenhouse gas emissions; urgency because of the growing evidence that climate change is a serious problem that should be addressed globally and quickly. The aim of this book is to take a close look at the fundamental political and economic processes driving climate change policy. It identifies institutional arrangements and policies that are needed to design more effective climate change policy. The book also examines ethical and distributional arguments that are critical in understanding and framing the climate debate. The book is built around a conference honouring Tom Schelling that took place at the Sustainable Consumption Institute at The University of Manchester in October 2010. Each chapter represents a significant contribution to the literature on the political economy of climate change.Less
There is widespread agreement that climate change is a serious problem. If we fail to regulate greenhouse gases that contribute to global warming, or use alternative strategies for addressing the problem, the damages could be significant, and perhaps catastrophic. After several international meetings in which nation states have tried unsuccessfully to address the climate change problem, there is a widespread sense of frustration and urgency: frustration at the slow pace at which countries are moving toward an international agreement to reduce greenhouse gas emissions; urgency because of the growing evidence that climate change is a serious problem that should be addressed globally and quickly. The aim of this book is to take a close look at the fundamental political and economic processes driving climate change policy. It identifies institutional arrangements and policies that are needed to design more effective climate change policy. The book also examines ethical and distributional arguments that are critical in understanding and framing the climate debate. The book is built around a conference honouring Tom Schelling that took place at the Sustainable Consumption Institute at The University of Manchester in October 2010. Each chapter represents a significant contribution to the literature on the political economy of climate change.
Joseph Heath
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195370294
- eISBN:
- 9780199871230
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195370294.003.0004
- Subject:
- Philosophy, Logic/Philosophy of Mathematics
This chapter begins with a summary of the classical sociological solution to the problem of order advanced by Talcott Parsons. The central flaw in the solution is simply that it lacks deliberative ...
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This chapter begins with a summary of the classical sociological solution to the problem of order advanced by Talcott Parsons. The central flaw in the solution is simply that it lacks deliberative microfoundations; it is not clear how social norms interact with beliefs and desires, the two intentional states posited by standard decision theory. A solution is proposed, which involved positing “principles” as a set of intentional states associated direction with actions. A formal representation is developed, and the attractions of the model, from the standpoint of representing a variety of different social interaction types, are then touted.Less
This chapter begins with a summary of the classical sociological solution to the problem of order advanced by Talcott Parsons. The central flaw in the solution is simply that it lacks deliberative microfoundations; it is not clear how social norms interact with beliefs and desires, the two intentional states posited by standard decision theory. A solution is proposed, which involved positing “principles” as a set of intentional states associated direction with actions. A formal representation is developed, and the attractions of the model, from the standpoint of representing a variety of different social interaction types, are then touted.
