Do We Do Enough for the Future?
A Normative Approach to the Evaluation of Long-Dated Investments
We examine the term structures of efficient risk-adjusted discount rates when the random walk of economic growth is affected by parametric uncertainty. Our results are generic in the sense that they do not rely on any structural assumption underlying this uncertainty. We show that parametric uncertainty does not affect the discount rates to be used to value very short zero-coupon bonds and equity. Moreover, it makes the term structure of the risk-free rates decreasing. The term structure of aggregate risk premia is increasing when the uncertain cumulants of log consumption are independent. Under some conditions, the term structure of risk-adjusted discount rates is increasing if and only if the asset’s beta is larger than two times the relative risk aversion. We apply these generic results to the case of an uncertain probability of macroeconomic catastrophes à la Barro (2006), and to the case of an uncertain trend or volatility of growth à la Veronesi (200) and Weitzman (2007). We show that these sources of uncertainty have a strong effect on efficient long-term discount rates.
Gollier is associate editor, editor or co-editor of scientific journals such as the Geneva Papers on Risk and Insurance Theory, the Journal of Risk and Uncertainty, the Journal of Risk and Insurance, and Management Science. He has also published 7 books on risk including “The Economics of Risk and Time”, MIT Press, winner of the 2001 Paul A. Samuelson Award. In October 2012, Princeton UP published his book entitled "Pricing the Planet's Future.”
Among many prizes and honors, Gollier was awarded the fellowship of the Econometric Society, the membership of the Institut Universitaire de France, the Ernst Meyer prize, the Erik Kempe award, and the Prix Edouard Bonnefous. He is one of the Lead Authors of the fourth and fifth Reports of the Intergovernmental Panel of Climate Change (IPCC, 2007 and 2013).
His current fields of interest extend from Decision Theory under Uncertainty to Environmental Economics through Finance, Investment, Consumption Theory, Insurance Economics and Cost-Benefit Analysis, with a special interest for long term (sustainable) effects.