Pricing the Planet's Future: The Economics of Discounting in an Uncertain World by Christian Gollier

Author:Christian Gollier [Gollier, Christian]
Language: eng
Format: epub, pdf
Publisher: Princeton University Press
Published: 0101-01-01T00:00:00+00:00

Let us first consider the special case of power utility functions with u′(c) = c-γ. That condition is then equivalent to

Because y0 and y1 are independent, the left-hand side of this inequality equals , which in turn is equal to the right-hand side of (8.13) since y0 and y1 are identically distributed. We conclude that condition (8.13) holds as an equality, which implies that the term structure of discount rates is flat.

Under constant relative risk aversion, the short-term rate r12 is independent of c1. Indeed, from (8.3), we have that

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