Gamma discounters are short-termist

Abstract

Using the gamma discounting argument of Weitzman (1998, 2001) when future interest rates are uncertain, several countries have decided to base their investment and sustainability policy evaluation on a decreasing term structure of discount rates. We show that this interpretation of the gamma discounting argument is in fact equivalent to the Local Expectations Hypothesis, a hypothesis globally rejected in empirical finance. We also show that gamma discounters are time-inconsistent and short-termist when shocks to economic growth are persistent. This is because they fail to account for the correlation between future consumption levels and spot interest rates.