Determining future environmental value: Empirical analysis of discounting over time and distance

Economists have argued about various discount rates. Strotz (1955-56) first suggested that there is no reason to consider a time-consistent discount rate such as an exponential function. Over the past five decades, various functional theoretical forms have been proposed, including exponential, hyperbolic, and quasi-hyperbolic. Simultaneously, empirical studies have found there is a possibility that observed discount rates are not constant over time. The data tend to not fit exponential functional forms but rather hyperbolic ones; this implies declining discount rates. Furthermore, empirical studies have found that discount rates vary across objects. Fredrick et al. (2002) summarized the annual discount rates found in previous empirical studies. Table 23.1 summarizes annual discount rates estimated in previous literature. The literature suggests various annual discount rates, and the results depend on the type of goods, the time range, and/or the estimation methods. In this chapter, we consider the discount rates on environmental values, and especially on long-term problems, as these are not empirically addressed in previous literature.