Equity, consistency, efficiency and new rules for discounting

Abstract

The trade-offs required by long-term projects pose problems in maintaining intertemporal equity and efficiency. Neither historical trends nor consumption changes during individual life-cycles can make the discount factors of modified discounting consistent. Mortality should be reflected in age-class distributions, not discount rates, while pure time preference is irrelevant to normative discounting. Modified discounting offers a politically soft option, requiring present generations to make relatively little sacrifice to enhance future consumption. Equity effects of introducing modified or zero discounting may be positive or negative. A fixed year zero for modified discounting is inequitable, and a floating one gives inconsistent decisions.