Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 559: Discounting and Relative Consumption
Olof Johansson-Stenman () and Thomas Sterner ()
Additional contact information
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640, SE 40530 GOTHENBURG, Sweden
Thomas Sterner: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640, SE 40530 GOTHENBURG, Sweden
Abstract: We analyze optimal social discount rates when people derive utility from relative consumption. We compare the social, private, and conventional Ramsey rates. Assuming a positive growth rate, we find that 1) the social discount rate exceeds the private discount rate if the importance of relative consumption increases with consumption and that 2) the social discount rate is smaller than the Ramsey rate given quasi-concavity in own and others’ consumption and risk aversion with respect to others’ consumption. Numerical calculations demonstrate that the latter difference may be substantial and have important implications for long run environmental issues such as global warming.
Keywords: Environmental discounting; global warming; relative consumption; Ramsey rule; positionality.
27 pages, March 8, 2013
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