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Article
Publication date: 6 March 2017

Sang Kyum Kim

The purpose of this paper is to examine the applicability of the alternative way of discounting, such as the hyperbolic discount method, for the economic feasibility test…

Abstract

Purpose

The purpose of this paper is to examine the applicability of the alternative way of discounting, such as the hyperbolic discount method, for the economic feasibility test on Free Trade Zone development project that needs intergenerational analysis.

Design/methodology/approach

To analyze the effects of applying alternative discounting method in the cost-benefit analysis, this paper uses the hyperbolic discount method and HM-Treasury’s method (Britain), as well as the traditional exponential discount method. Also, this study uses benefit and cost data from the actual feasibility test of the Free Trade Zone development project in Korea, to obtain better policy implication.

Findings

For the case of long-term analysis, using the exponential discounting method in the benefit-cost analysis could not give us balanced analytic results, because it discounts too much on future generation’s benefits. In contrast, if we use the hyperbolic discounting method, we could obtain better balanced results since it can control the generational effects. This paper also finds that for the results to be valid, the analysis period must be expanded long enough (a minimum of 100 years).

Originality/value

The major findings of this paper confirm the results of previous studies regarding long-term benefit-cost analysis. Also, the result of this paper is properly compatible with the findings of behavioral economics, such as the time inconsistency of preferences. However, no research has been done with the proper length of analytic periods for using hyperbolic discounting yet. To examine this matter, this paper performs benefit-cost analysis with actual data from the feasibility studies in Korea. To the best of the author’s knowledge, this is the first study to find the proper length of analytic periods that can be compatible with the hyperbolic discount method.

Details

Journal of Korea Trade, vol. 21 no. 1
Type: Research Article
ISSN: 1229-828X

Keywords

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Book part
Publication date: 1 November 2018

Julia Margarete Puaschunder

Climate control needs have reached momentum. While scientists call for stabilizing climate and regulators structure climate change mitigation and adaptation efforts around…

Abstract

Climate control needs have reached momentum. While scientists call for stabilizing climate and regulators structure climate change mitigation and adaptation efforts around the globe, economists are concerned with finding proper and fair financing mechanisms. In an overlapping-generations framework, Sachs (2014) solves the climate change predicament that seems to pit today’s against future generations. Sachs (2014) proposes that the current generation mitigates climate change financed through bonds to remain financially as well-off as without mitigation while improving environmental well-being of future generations through ensured climate stability. This intergenerational tax-and-transfer policy turns climate change mitigation into a Pareto improving strategy. Sachs’ (2014) discrete model is integrated in contemporary growth and resource theories. The following article analyzes how climate bonds can be phased-in, in a model for a socially optimal solution and a laissez-faire economy. Optimal trajectories are derived partially analytically (e.g., by using the Pontryagin maximum principle to define the optimal equilibrium), partially data driven (e.g., by the use of modern big market data), and partially by using novel cutting-edge methods – for example, nonlinear model predictive control (NMPC), which solves complex dynamic optimization problems with different nonlinearities for infinite and finite decision horizons. NMPC will be programed with terminal condition in order to determine appropriate numeric solutions converging to some optimal equilibria. The analysis tests if the climate change debt adjusted growth model stays within the bounds of a sustainable fiscal policy by employing NMPC, which solves complex dynamic systems with different nonlinearities.

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Article
Publication date: 25 September 2009

David Evans

The purpose of this paper is to examine uncertainty in the social discount rate and explore the conditions favouring the application of higher present value welfare…

Abstract

Purpose

The purpose of this paper is to examine uncertainty in the social discount rate and explore the conditions favouring the application of higher present value welfare weights in the cost‐benefit analysis (CBA) of very long‐term social projects. The plausibility, or otherwise, of these conditions is an important matter generally but especially in relation to major environmental concerns associated with climate change.

Design/methodology/approach

The uncertainty conditions for a plausible range of discount rate values are examined in relation to the social time preference rate (STPR). This particular discount rate is favoured theoretically and has, in the latest EC guide to CBA for EU member states, been recommended for application in European social project appraisal. Value ranges for the main parameters are determined on the basis of surveys of empirical work and expert opinion. Then simulations based on alternative plausible probability distributions are used to explore the future time paths for discount factors.

Findings

Present value welfare weights decline to less than 2 per cent within 200 years if discounting is based on the full STPR. However, important appraisal contexts are identified where only the utility discount rate is relevant and this yields non‐trivial discount factors for distant future years.

Originality/value

The main new contribution is a direct empirical focus on the STPR and its component parameters under uncertainty. Alternative sets of long‐term discount factors are suggested for possible application in CBA. The paper will be of interest to academics specialising in applied welfare economics and also to practitioners involved in social project appraisal.

Details

Journal of Economic Studies, vol. 36 no. 5
Type: Research Article
ISSN: 0144-3585

Keywords

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Abstract

Details

Optimal Growth Economics: An Investigation of the Contemporary Issues and the Prospect for Sustainable Growth
Type: Book
ISBN: 978-0-44450-860-7

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Book part
Publication date: 16 October 2007

Daniel H. Cole

Government agencies have endeavored, with limited success, to improve the methodological consistency of regulatory benefit–cost analysis (BCA). This paper recommends that…

Abstract

Government agencies have endeavored, with limited success, to improve the methodological consistency of regulatory benefit–cost analysis (BCA). This paper recommends that an independent cohort of economists, policy analysts and legal scholars take on that task. Independently established “best practices” would have four positive effects: (1) they would render BCAs more regular in form and format and, thus, more readily assessable and replicable by social scientists; (2) improved consistency might marginally reduce political opposition to BCA as a policy tool; (3) politically-motivated, inter-agency methodological disputes might be avoided; and (4) an independent set of “best practices” would provide a sound, independent basis for judicial review of agency BCAs.

Details

Research in Law and Economics
Type: Book
ISBN: 978-1-84950-455-3

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Article
Publication date: 6 April 2012

Takanori Ida and Kazuhito Ogawa

This paper aims to conduct a hypothetical dictator game with social distance and time delays using conjoint analysis.

Abstract

Purpose

This paper aims to conduct a hypothetical dictator game with social distance and time delays using conjoint analysis.

Design/methodology/approach

Responses from 1,347 Japanese adults are collected through an online survey, and their responses are analyzed using a random parameter logit model.

Findings

The paper finds that social preference for the present income of a stranger equals social preference for the income of an acquaintance 140 days later, of a close friend 224 days later, and of a family member 255 days later.

Originality/value

The paper simultaneously estimates social preference parameters, including the inequality aversion rate, the social discount rate, and the time discount rate.

Details

International Journal of Social Economics, vol. 39 no. 5
Type: Research Article
ISSN: 0306-8293

Keywords

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Article
Publication date: 10 June 2014

T.V. Grissom, M. McCord, D. McIlhatton and M. Haran

The purpose of this paper, which is the first of a two-part series, is to build upon the established research on environmental economics and sustainability theory…

Abstract

Purpose

The purpose of this paper, which is the first of a two-part series, is to build upon the established research on environmental economics and sustainability theory developed by Ramsey (1928), Weitzman (2007) and Gollier (2010). The Ramsey-Weitzman-Gollier model, with the contribution of Howarth (2009) and Nordhaus (2007a, b), focuses on discount rate development for environmental and long-term assets, linking discounted utility analysis embedded in the CCAPM model of Lucas (1978) to the policy concerns associated with the valuation of public and sustainable resources. This paper further investigates these issues to the rates structure appropriate for exhaustible resources with a particular emphasis on urban land, based upon the differentiation of strong and weak form sustainability concepts constrained by the objectives of the sustainable criterion of Daly and Cobb (1994).

Design/methodology/approach

The paper integrates the concepts of discount rate development for environmental and long-term assets and discounted utility analysis to the policy concerns associated with the valuation of public and sustainable resources. It develops new theoretical insight in order to allow the theoretical formulation of discount and capitalization rates that can be empirically applied and tested.

Findings

The paper provides theoretical support for a new approach concerned with the development of capitalization and discount rates in the valuation of non-renewable resources. A key concern of valuing non-renewable or limited resource endowments (in space or time) is the problem of irreversible investment or irrevocable decision implementation as suggested by Arrow-Fisher (1974), Krautkraemer (1985) and Daly and Cobb (1994). It investigates the challenge with developing capitalization rates and valuation of depleting resources temporally, within the constraints of sustainability. To achieve this, an optimal control discounting procedure subject to a sustainable objective statement is employed – in this context it suggests that sustainability should be treated as an alternative to traditional growth and the maximization of near-term returns.

Originality/value

This paper extends the construct of developing rates structures appropriate for the valuation of exhaustible resources. It places a conceptual emphasis on urban land development. The measures developed and the insights gained may serve as a basis for future research on the optimal levels of sustainable development appropriate for different nations.

Details

Property Management, vol. 32 no. 3
Type: Research Article
ISSN: 0263-7472

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Article
Publication date: 1 July 1999

Carsten Helm, Thomas Bruckner and Ferenc Tóth

In this paper, we critically review cost‐benefit analysis, cost‐effectiveness analysis and the guard‐rail approach as decision‐support tools for the choice of climate…

Abstract

In this paper, we critically review cost‐benefit analysis, cost‐effectiveness analysis and the guard‐rail approach as decision‐support tools for the choice of climate protection strategies. Our main focus is on the central role of value judgments, which arise from the need to value; first, uncertain environmental benefits from climate protection relative to other goods; second, the consumption of the present relative to future generations; and third the consumption of “poor” relative to “rich” people. Each of the three approaches analyzed has its shortcomings. Cost‐benefit analysis requires a complete and transitive preference ordering, which stands in sharp contrast to scientific uncertainties and valuation problems. Cost‐effectiveness analysis suffers from the difficulty of setting an appropriate climate protection target. Finally, the usefulness of the guard‐rail approach for decision‐makers depends on the extent to which it is possible to limit the choice set.

Details

International Journal of Social Economics, vol. 26 no. 7/8/9
Type: Research Article
ISSN: 0306-8293

Keywords

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Book part
Publication date: 20 November 2018

Dorian Jullien

This chapter conducts a systematic comparison of behavioral economics’s challenges to the standard accounts of economic behaviors within three dimensions: under risk, over…

Abstract

This chapter conducts a systematic comparison of behavioral economics’s challenges to the standard accounts of economic behaviors within three dimensions: under risk, over time, and regarding other people. A new perspective on two underlying methodological issues, i.e., inter-disciplinarity and the positive/normative distinction, is proposed by following the entanglement thesis of Hilary Putnam, Vivian Walsh, and Amartya Sen. This thesis holds that facts, values, and conventions have inter-dependent meanings in science which can be understood by scrutinizing formal and ordinary language uses. The goal is to provide a broad and self-contained picture of how behavioral economics is changing the mainstream of economics.

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Article
Publication date: 1 February 1971

C. SELBY SMITH

The paper is devoted to the question of how to allocate a given educational budget. Alternative avenues of expenditure on post‐secondary education are treated as…

Abstract

The paper is devoted to the question of how to allocate a given educational budget. Alternative avenues of expenditure on post‐secondary education are treated as investment projects and their benefit‐cost ratios are compared. The analysis is essentially static and is based on two investigations carried out by the author, one in Canada, the other in the United Kingdom. The paper is organised into three sections. The first discusses the methodology underlying the two detailed studies. The second presents conclusions on particular aspects of the general problem of allocating resources within formal education, and is divided into four parts: the balance between private and social costs and benefits, between academic levels of education, between types of education and between male and female education. The final section of the paper contains four more general points and emphasises our ignorance in much of this area.

Details

Journal of Educational Administration, vol. 9 no. 2
Type: Research Article
ISSN: 0957-8234

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