Hi Tom. Which discount rate did you use for the benefits from endogenous growth? GiveWell (GW) uses a discount rate on future consumption of 4 %/​year.
Good q. We did not directly adjust the endogenous growth term through any discount, it enters the model only as a multiplier. That said, the multipliers we use have underlying discount rates that they use (generally larger than 0). We probably could’ve harmonized in a smarter way to be able to answer your question, but the general point you are trying to make, I think, is that higher discount rates here might be appropriate because of long stream of future harms/​benefits (or perhaps just uncertainty). This would mean that our SCC is too large. Fair; and maybe!
Recall that our main SCC estimates are log-linear in income. In a linear model with 0% time preference, yes, the estimate would balloon because of the long tail. But in a log-linear model where people are getting richer, a 0% time preference essentially sets the effective discount to the growth rate (because future people are wealthier, and so additional dollar damages mean less to them). So this would mean that our initial SCC is probably smaller than you’d think *and* it is less sensitive than linear models to discount rates (by a nontrivial but not super large amount I would say).
Now the multipliers themselves, as I said above, use some discount rate and are not log-linear in income the way our base estimate is. So the actual discount rates are important here and might mean our multipliers modify our baseline SCC too muuch (our log-framework already downweighs far-off damages, but our current multiplier does not, making it large) or not enough (if the pure time preference is really closer to 0% than the rates they were estimated at, given how back-loaded growth damages are, making it too small).
All to say, the multiplier bit was a significant source of uncertainty to us when we wrote it (we labeled the endogenous growth multiplier as an adjustment with high uncertainty in our report) and happy to have had a bit more time to rethink some of these things and share our views on it now.
My understanding is that GWs pure time preference is similar to ours and that any differnece in effective discounts is related to how they treat uncertainty over the future, but I have’t looked into this.
Thanks for the clarifications. They made sense to me.
My understanding is that GWs pure time preference is similar to ours and that any differnece in effective discounts is related to how they treat uncertainty over the future, but I have’t looked into this.
Here are the details (linked here) about GW’s discount rate of 4 %. Pure time preference does not contribute to this.
We considered five reasons to assign a discount rate.
Increases in consumption over time meaning marginal increases in consumption in the future are less valuable. We chose a rate of 1.7% based on an expectation that economic consumption would grow at 3% each year, and the function through which consumption translates to welfare is isoelastic with eta=1.59. (Note that this discount rate should be applied to increases in ln(consumption), rather than increases in absolute consumption; see calculations here)
Temporal uncertainty. Uncertainty increases with projections into the future, meaning the projected benefits may fail to materialize. James recommended a rate of 1.4% based on judgement on the annual likelihood of an unforeseen event or longer term change causing the expected benefits to not be realized. Examples of such events are major changes in economic structure, catastrophe, or political instability. This does not include the probability that a person will die before realizing the full benefits of the intervention, which is captured elsewhere in our cost-effectiveness analysis.
Pure time preference (beneficiaries). People act in such a way that implies they would prefer spending now to later. We did not apply an additional adjustment for this factor. We believe the common use of self-commitment mechanisms such as savings accounts indicate that a preference for short term benefits is often an involuntary action (independently of reasons 1 and 2).
Pure time preference (donors). Donors may prefer to achieve benefits now rather than later independently of the relative benefit to the beneficiaries. We do not have this preference.
Compounding non-monetary benefits. There are non-monetary returns not captured in our cost-effectiveness analysis which likely compound over time and are causally intertwined with consumption. These include reduced stress and improved nutrition. We chose a rate of 0.9% to account for this based on discussion.
Hi Tom. Which discount rate did you use for the benefits from endogenous growth? GiveWell (GW) uses a discount rate on future consumption of 4 %/​year.
Good q. We did not directly adjust the endogenous growth term through any discount, it enters the model only as a multiplier. That said, the multipliers we use have underlying discount rates that they use (generally larger than 0). We probably could’ve harmonized in a smarter way to be able to answer your question, but the general point you are trying to make, I think, is that higher discount rates here might be appropriate because of long stream of future harms/​benefits (or perhaps just uncertainty). This would mean that our SCC is too large. Fair; and maybe!
Recall that our main SCC estimates are log-linear in income. In a linear model with 0% time preference, yes, the estimate would balloon because of the long tail. But in a log-linear model where people are getting richer, a 0% time preference essentially sets the effective discount to the growth rate (because future people are wealthier, and so additional dollar damages mean less to them). So this would mean that our initial SCC is probably smaller than you’d think *and* it is less sensitive than linear models to discount rates (by a nontrivial but not super large amount I would say).
Now the multipliers themselves, as I said above, use some discount rate and are not log-linear in income the way our base estimate is. So the actual discount rates are important here and might mean our multipliers modify our baseline SCC too muuch (our log-framework already downweighs far-off damages, but our current multiplier does not, making it large) or not enough (if the pure time preference is really closer to 0% than the rates they were estimated at, given how back-loaded growth damages are, making it too small).
All to say, the multiplier bit was a significant source of uncertainty to us when we wrote it (we labeled the endogenous growth multiplier as an adjustment with high uncertainty in our report) and happy to have had a bit more time to rethink some of these things and share our views on it now.
My understanding is that GWs pure time preference is similar to ours and that any differnece in effective discounts is related to how they treat uncertainty over the future, but I have’t looked into this.
Thanks for the clarifications. They made sense to me.
Here are the details (linked here) about GW’s discount rate of 4 %. Pure time preference does not contribute to this.