Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates

Eli P. Fenichel, Matthew Kotchen and Ethan T. Addicott

No 23591, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: H43 O21 Q54 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-age, nep-ene and nep-upt
Note: EEE PE
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Citations: View citations in EconPapers (5)

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