Against High Discount Rates

Abstract

The theory of discounting is based on the assumption that people's observed behavior in markets for savings and investment reveals their subjective preferences regarding trade-offs between present and future economic benefits. A person who borrows money at the annual interest rate r, for example, shows a willingness to pay (1+r)t dollars t years in the future to obtain one dollar in the present. On the other side of this transaction, the lender demands (1+r)t future dollars in exchange for each dollar loaned out today. In the logic of this situation, both borrowers and lenders behave as if one dollar of future currency has a “present value” of just

Opens in a new window.

. In this expression, the interest rate, r, is interpreted as the prevailing “discount rate” or time value of money.

Citation

Howarth, R.B. (2005), "Against High Discount Rates", Sinnott-Armstrong, W. and Howarth, R.B. (Ed.) Perspectives on Climate Change: Science, Economics, Politics, Ethics (Advances in the Economics of Environmental Resources, Vol. 5), Emerald Group Publishing Limited, Leeds, pp. 99-120. https://doi.org/10.1016/S1569-3740(05)05005-4