Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates
We develop a demographically-based approach for estimating the utility discount rate (UDR) portion of the Ramsey rule. We show how age-specific mortality rates and life expectancies imply a natural UDR for individuals at each age in a population, and these can be aggregated into a population-level social UDR. We then provide empirical estimates for nearly all countries and for the world as a whole. A striking part of the analysis is how the estimated UDRs fall within the range of those currently employed in the macroeconomics and climate change literatures. We use our results to derive heterogenous social discount rates across countries and explore the consequences for an integrated assessment model of climate change. We find that introducing regional heterogeneity of UDRs into the RICE model has little impact on the business-as-usual trajectory of global emissions. It does, however, change the trajectory of optimal emissions, the corresponding optimal carbon tax, and the distribution of emission reductions across countries.
The authors are grateful to the Knobloch Family Foundation for financial support, Whitney Boone for valuable research assistance, and Lint Barrage and Glenn-Marie Lange for helpful comments and discussion. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.