This paper investigates a duality between ambiguity averse preferences and the valuation of long run risky assets or public projects. The variational ambiguity model represents preferences over ambiguous acts via a minimization problem, and is fundamentally nonprobabilistic. In contrast, long run risky assets are ranked via a large maturity limit of expected discounted returns. Despite their apparent differences, we show that each variational ambiguity preference is a long run risk preference, and (under natural conditions) vice versa. We explore three implications: a notion of long run stochastic dominance that resolves differences between stochastic processes considered identical by standard risk measures, a typology of stochastic processes that pinpoints when a non-probabilistic description of long run risk is required, and an evolutionary foundation for variational ambiguity preferences that offers a novel explanation for ambiguity aversion.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

This paper provides a critical review of the literature on choosing social discount rates (SDRs) for public cost-benefit analysis. We discuss two dominant approaches, the first based on market prices and the second based on intertemporal ethics. While both methods have attractive features, neither is immune to criticism. The market-based approach is not entirely persuasive even if markets are perfect, and faces further headwinds once the implications of market imperfections are recognised. By contrast, the ‘ethical’ approach—which relates SDRs to marginal rates of substitution implicit in a single planner’s intertemporal welfare function—does not rely exclusively on markets, but raises difficult questions about what that welfare function should be. There is considerable disagreement on this matter, which translates into enormous variation in the evaluation of long-run payoffs. We discuss the origins of these disagreements, and suggest that they are difficult to resolve unequivocally. This leads us to propose a third approach that recognises the immutable nature of some normative disagreements, and proposes methods for aggregating diverse theories of intertemporal social welfare. We illustrate the application of these methods to social discounting, and suggest that they may help us to move beyond long-standing debates that have bedevilled this field. (JEL D60, D61, D71, H43, H54)

Disagreements about normative aspects of social time preferences have led to estimates of the social cost of carbon (SCC) that differ by orders of magnitude. We investigate how disagreements about the SCC change if planners are nondogmatic, that is, they admit the possibility of a change in their normative views and internalize the preferences of future selves. Although nondogmatic planners may disagree about all the contentious aspects of social time preferences, disagreements about the SCC reduce dramatically. Admitting the possibility of a change in views once every 40 years results in a fivefold reduction in the range of recommended SCCs.

Commentators often lament forecasters’ inability to provide precise predictions of the long-run behavior of complex economic and physical systems. Yet their concerns often conflate the presence of substantial long-run uncertainty with the need for long-run predictability; short-run predictions can partially substitute for long-run predictions if decision-makers can adjust their activities over time. So what is the relative importance of short- and long-run predictability? We study this question in a model of rational dynamic adjustment to a changing environment. Even if adjustment costs, discount factors, and long-run uncertainty are large, short-run predictability can be much more important than long-run predictability. (JEL D21, D81, D83)

The long-run social discount rate has an enormous effect on the value of climate mitigation, infrastructure projects, and other long-term public policies. Its value is however highly contested, in part because of normative disagreements about social time preferences. I develop a theory of “nondogmatic” social planners, who are insecure in their current normative judgments and entertain the possibility that they may change. Although each nondogmatic planner advocates an idiosyncratic theory of intertemporal social welfare, all such planners agree on the long-run social discount rate. Nondogmatism thus goes some way toward resolving normative disagreements, especially for long-term public projects. (JEL D61, H43)

How do voters' behavioural biases affect political outcomes? We study this question in a model of Downsian electoral competition in which candidates have private information about the benefits of policies, and voters may infer candidates' information from their electoral platforms. If voters are Bayesian, candidates ‘anti-pander’ – they choose platforms that are more extreme than is justified by their private beliefs. However, anti-pandering is ameliorated if voters' inferences are subject to confirmation bias. Voter confirmation bias causes elections to aggregate candidates' information better, and all observers, whether biased or Bayesian, would like the voters in our model to exhibit more confirmation bias than they do themselves.

A large literature draws a stark distinction between ‘positive’ (i.e., based on prices) and ‘normative’ (i.e., based on ethics) approaches to choosing discount rates for project appraisal. This paper unifies these approaches in a model of a sophisticated ethical agent who may trade part of her endowment on incomplete markets. Such an agent should use market interest rates to discount payoffs in marketed states. Discount rates in non-marketed states, however, depend on both ethics and prices. Normative discount rates that do not explicitly account for those trading opportunities that do exist exhibit significant biases, even if trade is highly constrained. How should ethical agents – benevolent governments, philanthropic foundations, or altruistic investors – discount the future when evaluating marginal projects? The literature on social discounting offers two materially different approaches to this question, one ‘positive’, the other ‘normative’ (see e.g. Gollier & Hammitt, 2014, for a review). In the positive approach markets are paramount; discount rates are taken to reflect the opportunity costs of investment, which are captured by market rates of return. The normative approach, on the other hand, emphasises ethics; discount rates reflect the marginal rate of substitution between consumption in the future and consumption in the present, as calculated by a benevolent ethical planner. Prices play no explicit role in the normative approach ∗Email: amillner@econ.ucsb.edu. I am grateful to Ben Groom, Larry Karp, and Kieran Walsh for helpful discussions.

We study a dynamic social choice problem in which a sequence of committees must decide how to consume a public asset. A committee convened at time t decides on consumption at t, accounting for the behaviour of future committees. Committee members disagree about the appropriate value of the pure rate of time preference, but must nevertheless reach a decision. If each committee aggregates its members' preferences in a utilitarian manner, the collective preferences of successive committees will be time inconsistent, and they will implement inefficient consumption plans. If however committees decide on the level of consumption by a majoritarian vote in each period, they may improve on the consumption plans implemented by utilitarian committees. Using a simple model, we show that this occurs in empirically plausible cases. Application to the problem of choosing the social discount rate is discussed.

Recent work on collective intertemporal choice suggests that non-dictatorial social preferences are generically time inconsistent. We argue that this claim conflates time consistency with two distinct properties of preferences: stationarity and time invariance. While time invariance and stationarity together imply time consistency, the converse does not hold. Although non-dictatorial social preferences cannot be stationary, they may be time consistent if time invariance is abandoned. If individuals are discounted utilitarians, revealed preference provides no guidance on whether social preferences should be time consistent or time invariant. Nevertheless, we argue that time invariant social preferences are often normatively and descriptively problematic.

Uncertainty is ubiquitous in environmental economics: the field studies interactions between socio-economic and biogeochemical systems and neither is fully understood. So our grasp of their interactions is necessarily limited. We argue that this pervasive uncertainty is best modeled as ambiguity rather than risk, as a set of situations where multiple prior probability distributions arise naturally and must be considered by the decision maker. We review briefly how this insight can affect our understanding of two iconic issues in environmental economics, climate change and biodiversity loss.

Benefit-cost integrated assessment models (BC-IAMs) inform climate policy debates by quantifying the trade-offs between alternative greenhouse gas abatement options. They achieve this by coupling simplified models of the climate system to models of the global economy and the costs and benefits of climate policy. Although these models have provided valuable qualitative insights into the sensitivity of policy trade-offs to different ethical and empirical assumptions, they are increasingly being used to inform the selection of policies in the real world. To the extent that BC-IAMs are used as inputs to policy selection, our confidence in their quantitative outputs must depend on the empirical validity of their modeling assumptions. We have a degree of confidence in climate models both because they have been tested on historical data in hindcasting experiments and because the physical principles they are based on have been empirically confirmed in closely related applications. By contrast, the economic components of BC-IAMs often rely on untestable scenarios, or on structural models that are comparatively untested on relevant time scales. Where possible, an approach to model confirmation similar to that used in climate science could help to build confidence in the economic components of BC-IAMs, or focus attention on which components might need refinement for policy applications. We illustrate the potential benefits of model confirmation exercises by performing a long-run hindcasting experiment with one of the leading BC-IAMs. We show that its model of long-run economic growth-one of its most important economic components-had questionable predictive power over the 20th century.

The long-run social discount rate sets the rate of return a public project with long-term consequences must earn to be welfare improving, and is thus a critical input to the cost benefit analysis of policies such as climate change mitigation, nuclear waste management, and infrastructure investments. Economists have had persistent disagreements about the appropriate values of the welfare parameters that determine this quantity, leading to substantial disagreements on the benefits of policies with long-run consequences. I present a model in which public decision-makers have heterogeneous opinions about the normative inputs to social discounting formulae, but their preferences are non-paternalistic, i.e. they do not impose their own views on others when evaluating future social wellbeing. I show that non-paternalism causes all decision-makers to agree on the long-run social discount rate. While surveys suggest that the 5-95% range of economists' recommended values for the social discount rate is 1-7%/yr in common growth scenarios, non-paternalism could reduce this to a range of 3.2-3.3%/yr for projects with a maturity of 50 years, with even greater consensus emerging for longer maturities.

Experts and the general public often perceive environmental problems differently. Moreover, regulatory responses to environmental issues often do not coincide with consensus expert recommendations. These two facts are mutually consistent—it is unlikely that regulations based on factual claims that are substantially different from voters’ opinions would be politically feasible. Given that the public’s beliefs constrain policy choices, it is vital to understand how beliefs are formed, whether they will be biased, and how the inevitable heterogeneity in people’s beliefs filters through the political system to affect policy. We review recent theoretical and empirical work on individual inference, social learning, and the supply of information by the media and identify the potential for biased beliefs to arise. We then examine the interaction between beliefs and politics: can national elections and legislative votes be expected to result in unbiased collective decisions, do heterogeneous beliefs induce strategic political actors to alter their policy choices, and how do experts and lobby groups affect the information available to policymakers? We conclude by suggesting that the relationship between beliefs and policy choices is a relatively neglected aspect of the theory of environmental regulation, and a fruitful area for further research.

Recent work on collective intertemporal choice suggests that non-dictatorial social preferences are generically time inconsistent. We argue that this claim conflates time consistency with two distinct properties of preferences: stationarity and time invariance. While the conjunction of time invariance and stationarity implies time consistency, the converse does not hold. Although social preferences cannot be stationary, they may be time consistent if time invariance is abandoned. If individuals are discounted utilitarians, revealed preference provides no guidance on whether social preferences should be time consistent or time invariant. Nevertheless, we argue that time invariant social preferences are often normatively and descriptively problematic.

Developing countries are vulnerable to the adverse effects of climate change, yet there is disagreement about what they should do to protect themselves from anticipated damages. In particular, it is unclear what the optimal balance is between investments in traditional productive capital (which increases output but is vulnerable to climate change), and investments in adaptive capital (which is unproductive in the absence of climate change but 'climate-proofs' vulnerable capital). We develop a model of investment in adaptive and productive capital stocks, and show that while it is unlikely that the optimal strategy involves no adaptation, the scale and composition of optimal investments depends on empirical context. Application of our model to sub-Saharan Africa suggests, however, that in most contingencies it will be optimal to grow the adaptive sector more rapidly than the vulnerable sector over the coming decades, although it never exceeds 1 per cent of the economy. Our sensitivity analysis goes well beyond the existing literature in evaluating the robustness of this finding.

We study collective choice when individuals have heterogeneous discounted utilitarian preferences. Two attractive properties of intertemporal preferences are indistinguishable for individuals, but have dramatically different implications for collective choice. Time Consistency requires a plan that is optimal at one evaluation date to be optimal at all later evaluation dates, while Time Invariance requires preferences to be unchanged under translations of the time axis. We study the implications of these two properties in a tractable dynamic model that captures both common resource and public goods problems. Utilitarian social planners implement the first best if collective preferences are time consistent, but not if they are time invariant. Decentralized alternatives { property rights (for common resources) and voting (for public goods) { can strictly improve on the planning equilibrium if social preferences are time invariant. We reflect on the implications of these fndings for dynamic welfare economics. Revealed preference cannot determine which property we should adopt, but each property is normatively attractive in some contexts.

Stratospheric injection of sulphate aerosols has been advocated as an emergency geoengineering measure to tackle dangerous climate change, or as a stop-gap until atmospheric carbon dioxide levels are reduced. But it may not prove to be the game-changer that some imagine.

We consider a two period model in which an incumbent political party chooses the level of a current policy variable unilaterally, but faces competition from a political opponent in the future. Both parties care about voters' payoffs, but they have different beliefs about how policy choices will map into future economic outcomes. We show that when the incumbent party can endogenously influence whether learning occurs through its policy choices (policy experimentation), future political competition gives it a new incentive to distort its policies — it manipulates them so as to reduce uncertainty and disagreement in the future, thus avoiding facing competitive elections with an opponent very different from itself. The model thus demonstrates that all incumbents can find it optimal to ‘over experiment’, relative to a counterfactual in which they are sure to be in power in both periods. We thus identify an incentive for strategic policy manipulation that does not depend on parties having conflicting objectives, but rather stems from their differing beliefs about the consequences of their actions.