Does ‘better’ discounting lead to ‘worse’ outcomes in long-run decisions? The dilemma of hyperbolic discounting

Winkler, Ralph (2006). Does ‘better’ discounting lead to ‘worse’ outcomes in long-run decisions? The dilemma of hyperbolic discounting. Ecological economics, 57(4), pp. 573-582. Elsevier 10.1016/j.ecolecon.2005.05.013

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The shortcomings of conventional discounting, especially in the context of long-run environmental problems, have been extensively discussed in the literature. Recently, hyperbolic discounting, i. e. discounting at declining instead of constant discount rates, has attracted a lot of interest among both scientists and politicians. Although there are compelling arguments for employing hyperbolic discounting, there are also pitfalls, which have to be pointed out. In this paper I show that the problem of time-inconsistency, an inherent characteristics of hyperbolic discounting, leads to a potential clash between economic efficiency and intergenerational equity. As an example, I refer to the weak progress in the controlling of greenhouse gas emissions under the Kyoto protocol. As the problem of time-inconsistency cannot be solved on economic grounds alone, there is a need for an intergenerational moral commitment.

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