Department of Agricultural and Resource Economics

The uncertainty of future economic development affects the term structure of discount rates and, thus, the intertemporal weights that are tobe used in cost benefit analysis. The U.K. and France have recently adopteda falling term structure to incorporate uncertainty and the U.S. is consideringa similar step. A series of publications discusses the following concern: Aseemingly analogous argument used to justify falling discount rates can alsobe used to justify increasing discount rates. We show that increasing anddecreasing discount rates mean different things, can coexist, are created bydifferent channels through which risk affects evaluation, and have the samequalitative effect of making long-term payoffs more attractive.