Skip to main content
SpringerLink
Log in

The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process

  • Published:
Environmental and Resource Economics Aims and scope Submit manuscript

Abstract

The long term discount rate is critically dependent upon projections of future growth rates that are fuzzier in proportion to the remoteness of the time horizon. This paper models such increasing fuzziness as an evolving hidden-state stochastic process. The underlying trend growth rate is an unobservable random walk hidden by noisy transitory shocks and recoverable only as a probability distribution via Bayesian updating. A simple expression is derived for the time-declining Ramsey discount rate. The components of this hidden-state Ramsey discounting formula are then analyzed, followed by a few remarks about possible implications and applications.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Gollier C (2012) Pricing the planet’s future: the economics of discounting in an uncertain world. Princeton University Press, Princeton (forthcoming October 2012)

  • Gollier C, Weitzman ML (2010) How should the distant future be discounted when discount rates are uncertain?. Econ Lett 107(3): 350–353

    Article  Google Scholar 

  • Groom B, Koundouri P, Panopoulou E, Pantelidis T (2007) Discounting the distant future: how much does model selection affect the certainty equivalent rate?. J Appl Econom 22(3): 641–656

    Article  Google Scholar 

  • Maddison A (2001) The world economy: a millennial perspective. OECD Publishing

  • Newell RG, Pizer WA (2003) Discounting the distant future: how much do uncertain rates increase valuations?. J Environ Econ Manag 46: 519–529

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Harvard University, Cambridge, MA, 02138, USA

    Martin L. Weitzman

Authors
  1. Martin L. Weitzman
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Martin L. Weitzman.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Weitzman, M.L. The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process. Environ Resource Econ 53, 309–321 (2012). https://doi.org/10.1007/s10640-012-9594-y

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10640-012-9594-y

Keywords

Search

Navigation