Random Discounting and Assessment of Intertemporal Projects: a Non-expected Utility Approach

TL;DR

This paper explores how society's collective discount rate for intertemporal projects can be modeled using random individual discount factors within a rank-dependent utility framework, highlighting effects on social discounting.

Contribution

It introduces a novel approach to aggregate heterogeneous individual discount factors into a social discount rate using rank-dependent utility theory, considering both ex ante and ex post perspectives.

Findings

Social planner's discount factor is a convex combination of individuals' factors under Pareto condition.

Method to derive social discount factor distribution from heterogeneous individual distributions.

Overweighing small probabilities accelerates social discount rate decline compared to expected utility.

Abstract

This paper assumes each individual in society has a random discount factor and assesses an intertemporal project using rank-dependent expected utility theory. We consider both the ex ante and the ex post approaches. For the former, we show the social planner's discount factor is a convex combination of those of the individuals under the standard Pareto condition. For the latter, we propose a method for determining the social planner's discount factor distribution from the individuals' distributions, which are possibly heterogenous. We demonstrate that relative to expected utility, overweighing of small probabilities can substantially accelerate the decline of the social discount rate.