Discounting and the representative median agent

Johannes Emmerling, Ben Groom and Tanja Wettingfeld

Economics Letters, 2017, vol. 161, issue C, 78-81

Abstract: We derive a simple formula for the social discount rate (SDR) that uses the median, rather than average agent of the economy to reflect the consequences of consumption growth on income inequality. Under reasonable assumptions, the difference between the growth of median and mean incomes is used to adjust the wealth-effect in the standard Ramsey rule. In a plausible special case the representative agent has the median income. With inequality aversion elasticity of 2 (1.5, 1), the U.K. and U.S. SDR would be 1% (0.5%, 0.25%) lower than the standard Ramsey rule. This reflects two decades of inequality-increasing growth and implies greater weight placed on future generations in public appraisal.

Keywords: Social discount rate; Income inequality; Inequality aversion; Cost benefit analysis (search for similar items in EconPapers)
JEL-codes: D31 D61 H43 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Working Paper: Discounting and the representative median agent (2017)
Working Paper: Discounting and the Representative Median Agent (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:161:y:2017:i:c:p:78-81

DOI: 10.1016/j.econlet.2017.09.031

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