Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89254
Authors: 
Vermeylen, Koen
Year of Publication: 
2013
Series/Report no.: 
Tinbergen Institute Discussion Paper 13-203/VI
Abstract: 
This paper uses the Kaldor-Hicks compensation principle to compute the present value (PV) of a non-marginal future event. Three theoretical results stand out: First, decreasing returns to capital create a wedge between the PV of future generations' willingness to pay (WTP) and the PV of their willingness to accept compensation (WTA); second, the discount rates implicit in the computation of the PVs are endogenous, and rising (declining) over time for the future generations' WTP (WTA); and third, decreasing returns to capital may make it impossible to compensate future generations according to their WTA, effectively defeating the tyranny of discounting. A back-of-the-envelope calibration suggests that this last result is realistic in the case of climate change. A cost-benefit analysis based on the Kaldor-Hicks compensation principle may therefore be impossible if futu re generations are entitled to a world without climate change; and an environmental trust fund - no matter how large it is - may be insufficient to adequately compensate future generations.
Subjects: 
climate change
cost-benefit analysis
discounting
WTP
WTA
JEL: 
D61
E13
H43
Q51
Q54
Document Type: 
Working Paper

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