Sustainability in a Risky World
We view sustainability as a requirement that welfare should not be expected to decline over time. We impose this requirement as a prior constraint on the consumption-savings-investment problem, and study its implications for saving, risky investment, and the social discount rate. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustainable time preference rate and on the sustainable consumption-wealth ratio, which we show must lie between the riskless rate and the expected return on optimally invested wealth.
We acknowledge helpful comments from Phil Dybvig, Antony Millner, Nicholas Stern, and seminar participants at Harvard University and at INSEAD. Ian Martin is grateful for support from the Paul Woolley Centre. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
John Y. Campbell
All John Campbell's outside activities are disclosed online at https://scholar.harvard.edu/campbell/outsideactivities.