Individual Time Preferences and Social Discounting in Environmental Projects
Individual Time Preferences and Social Discounting in Environmental Projects

Summary/Abstract: In this paper we have reviewed the literature on social discounting, and pointed out how individual preferences shape the social discount rate. However, people’s intertemporal preferences present some anomalies that undermine the validity of the classical model that relies on an exponentially discounted utility. One of these anomalies is that individuals present time-decreasing discount rates, exhibiting what is widely called “hyperbolic discounting”. It has been pointed out that the use of hyperbolic discounting is rational in evaluating public policies if uncertainty affects future outcome and when the SDR results from the aggregation of exponential consumers. The use of such a function has some positive environmental policy implications when considering interventions showing net benefits occurring in the far-distant future, as in the case of policies against global warming. Finally, a word on future research, which we feel should be conducted mainly in two fields. Blundell and Stoker (2005) point out the importance of heterogeneity treatment in the estimation of economic aggregates. Gollier and Zeckhauser (2005) provide some necessary and sufficient conditions for the aggregation of individual time preferences into a social aggregate under very strict conditions. On this point, by using large data sets, such as the households surveys provided by most industrialized countries’ governments or central banks, it would be interesting to investigate the cross-section distribution of individual discount rates, as well as to verify some of the basic theoretic postulates that can be drawn from the literature on the aggregation of preferences. Secondly, Laibson et al. (2004) propose the use of a general model to estimate individual discount functions by making use of simulated moments estimation procedures on data on credit card borrowing in the U.S. In the European context, it would be very useful to estimate such functions, as well as to investigate in this framework the impact of aggregation of time preferences.

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