Intertemporal Risk Aversion, Stationarity and the Rate of Discount

Two central concerns in the sustainability debate are the weight given to the needs of future generations and the application of the precautionary principle. In an economic model, these aspects of intertemporal evaluation can be mapped into time preference and intertemporal risk aversion. The current analysis points out a close link between these different aspects of intertemporal evaluation from the perspective of time consistent decision making under uncertainty. For this purpose, the paper analyzes the consequences of a stationary evaluation of the future for decision makers exhibiting a non-trivial intertemporal risk attitude. The modeling framework is a general recursive utility setting in a multi commodity world. I translate the standard stationarity assumption into a finite time horizon, in order to avoid implicit assumptions on the rate of pure time preference. To this end, the corresponding axiom is decomposed into two primitive statements. Stationary evaluation of risky outcomes is then combined with the assumption that the timing of uncertainty resolution only affects evaluation, when the derived information can be used to alter outcomes or outcome probabilities. I show that under these assumptions, a time consistent and intertemporal risk averse decision maker has to exhibit a pure rate of time preference of zero. Such a decision maker is no longer free to devalue the future for reasons of pure impatience, but gives reduced weight to welfare that is uncertain. When uncertainty increases over time, this fact resembles discounting. However, the more a decision maker can know about the future, the more weight it will carry.