Should governments use a discount rate that declines over time when evaluating the future benefits and costs of public projects? The argument for using a declining discount rate (DDR) is simple: if the discount rates that will be applied in the future are uncertain but positively correlated, and if the analyst can assign probabilities to these discount rates, then the result will be a declining schedule of certainty-equivalent discount rates. There is a growing empirical literature that estimates models of long-term interest rates and uses them to forecast the DDR schedule.
Should Governments Use a Declining Discount Rate in Project Analysis?Maureen Cropper, Kenneth Arrow, Christian Gollier, Ben Groom, Geoffrey Heal, Richard Newell, William Nordhaus, Robert Pindyck, William A. Pizer, Paul Portney, Thomas Sterner, Richard Tol, and Martin Weitzman ,
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Review of Environmental Economics and Policy