Optimal Rotation under Continually – or Continuously – Declining Discount Rate
2017
Price, Colin
It has been argued from a number of perspectives that the discount ratemight decline with increasing period of discounting. With a stepped profileof decline, financially optimal rotations are quite likely to occur at a fewdiscrete ages. For any form of declining discount rate, successor rotationswill lengthen, and this will affect the optimal length of earlier rotations. Butif rotation length is reassessed periodically, successor rotations will beadjusted downwards from those deemed optimal by a prior generation – astandard problem of dynamic inconsistency. This adjusted sequence ofrotations will be deemed by the original decision makers to be less valuablethan a sequence of lengthening rotations, and this may affect their ownchoice of optimal rotation. Whether, and how much, adjustment isappropriate, depends on the reasons underlying the decline of discount rates.
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