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Checking the Evidence for Declining Discount Rates

Szekeres, Szabolcs (2020): Checking the Evidence for Declining Discount Rates.

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Abstract

A numerical model is used to experimentally compute certainty equivalent discount rates (CERs) of risk neutral and risk-averse decision makers. Investors are characterized by utility functions of the constant-intertemporal-elasticity-of-substitution (CIES) type. Stochastic interest rates are generated using a Cox, Ingersoll & Ross (CIR) type model, calibrated to 1992-2017 US three-month Treasury Bill rates. The paper replicates empirical studies providing evidence for declining discount rates (DDRs) and tests claims regarding risk averse CERs in a descriptive discounting context. It is shown that DDRs as proposed by Weitzman are based on a fallacy. The reviewed papers seeking empirical evidence of DDRs repeat the mistake. Risk averse CERs can be decline with time because of portfolio effects. If these are low, risk averse CERs are slightly lower than risk neutral ones but not secularly declining.

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