School of Forestry & Environmental Studies
195 Prospect Street
New Haven, CT 06511
Institutional Affiliation: Yale University
NBER Working Papers and Publications
|July 2017||Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates|
with Matthew J. Kotchen, Ethan T. Addicott: w23591
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 mo...