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

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

Journal of the Association of Environmental and Resource Economists, 2020, vol. 7, issue 2, 379 - 415

Abstract: We develop a demographic 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, long-term UDR for individuals at each age, and these can be aggregated into a population-level social UDR. We provide estimates for nearly all countries and the world. Our estimates fall within the range of those currently employed in the literature, and the empirical basis of our methodology provides a useful point of comparison for alternative assumptions about the UDR. We use our results to derive heterogeneous 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 a small effect on the business-as-usual trajectory of global emissions, yet a more substantial effect on optimal emissions and the distributional burden of emission reductions.

Date: 2020
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