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2003•Toulouse Capitole Publications (University Toulouse 1 Capitole)Requires access

Maximizing the Expected Net Future Value as an Alternative Strategy to Gamma Discounting

Christian Gollier

Open publisher page 1 citations

Abstract

We examine the problem of selecting the discount rate for far dis-tant cash-flows when there is much uncertainty about what will be the future investment opportunities in the economy. We show that it is efficient to take a discount rate that is increasing with the time horizon, and that this rate should tend to the largest possible rate as the horizon tends to infinity. These recommendations are opposite to the ones proposed by Weitzman (2001) in this journal. ∗This paper has benefitted from intense discussions with François Salanié and Richard Zeckhauser. 1

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We examine the problem of selecting the discount rate for far dis-tant cash-flows when there is much uncertainty about what will be the future investment opportunities in the economy. We show that it is efficient to take a discount rate that is increasing with the time horizon, and that this rate should tend to the largest possible rate as the horizon tends to infinity. These recommendations are opposite to the ones proposed by Weitzman (2001) in this journal. ∗This paper has benefitted from intense discussions with François Salanié and Richard Zeckhauser. 1

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Available abstract

We examine the problem of selecting the discount rate for far dis-tant cash-flows when there is much uncertainty about what will be the future investment opportunities in the economy. We show that it is efficient to take a discount rate that is increasing with the time horizon, and that this rate should tend to the largest possible rate as the horizon tends to infinity. These recommendations are opposite to the ones proposed by Weitzman (2001) in this journal. ∗This paper has benefitted from intense discussions with François Salanié and Richard Zeckhauser. 1

Key concepts: Discounting, Economics, Net present value, Present value, Horizon, Infinity, Investment (military), Cash flow

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