Sustainability in a Risky World

John Campbell and Ian Martin

American Economic Review: Insights, 2025, vol. 7, issue 2, 196-212

Abstract: How much consumption is sustainable, if "sustainability" requires that welfare should not be expected to decline over time? We impose a sustainability constraint on a standard consumption/portfolio choice problem. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustainable consumption-wealth ratio, which must lie between the riskless interest rate and the expected return on wealth (and if risky capital evolves according to a geometric Brownian motion, it lies exactly halfway between the two). Sustainability requires an upward drift in wealth and consumption to compensate future generations for the increased risk they face.

JEL-codes: D63 D81 E21 G51 H43 Q01 (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: Sustainability in a Risky World (2022)
Working Paper: Sustainability in a risky world (2021)
Working Paper: Sustainability in a Risky World (2021)
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DOI: 10.1257/aeri.20240061

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