Abstract
AbstractUtility discounting in intertemporal economic modelling has been viewed as problematic, both for descriptive and normative reasons. However, positive utility discount rates can be defended normatively; in particular, it is rational for future utility to be discounted to take into account model-independent outcomes when decision-making under risk. The resultant values will tend to be smaller than descriptive rates under most probability assignments. This also allows us to address some objections that intertemporal considerations will be overdemanding. A principle for utility discount rates is suggested which is rooted in probability discounting. Utility discounting is defended against objections from Parfit (1984) and Broome (2005); Broome (2012). A sample utility discount rate is estimated.
Highlights
When doing cost-benefit analyses for a policy or project, analysts try to consider all the costs and benefits of the project. They weight them using temporal discount factors in order to arrive at present values for those costs and benefits
There are different types of discount factors and different types of associated discount rates that can be generated by a sequence of discount factors
We could think of the medium term (e. g. 50–100 years into the future) as reasonably being a period for social decision-making under risk, with uncertainty beyond that. If this is acceptable, it is worth pointing out that many models— including the climate Integrated Assessment Models (IAMs) under consideration in this paper—run ‘only’ to 2100 so this worry may be more of a theoretical concern than a practical one
Summary
When doing cost-benefit analyses for a policy or project, analysts try to consider all the costs and benefits of the project. I argue that such a utility discount rate can be generated by appealing to the subjective probability of a particular set of outcomes, outcomes in which the policy under consideration fails to make a difference This is a way of both generalizing and theoretically grounding a common economic reason to discount utility, which is the exogenous probability of extinction The discount factors that I defend can be thought of as the subjective probability that the policies under consideration make their intended or expected difference Using this argument, the paper (a) generalizes accounting from a single outcome, extinction, to a broader class of outcomes that I call model-independent outcomes; (b) argues that addressing these model-independent outcomes in terms of utility discounting is superior to explicit expected value calculations; and be overdemanding and subject to spatial discounting (thanks to an anonymous reviewer for pushing this point).
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