Discounting and relative consumption

Olof Johansson-Stenman (olof.johansson@economics.gu.se) and Thomas Sterner

Journal of Environmental Economics and Management, 2015, vol. 71, issue C, 19-33

Abstract: We analyze optimal social discount rates when people derive utility from relative consumption, i.e. their own consumption level relative to the consumption level of others. 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 lower 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 (search for similar items in EconPapers)
JEL-codes: D63 D90 H43 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Discounting and Relative Consumption (2013)
Working Paper: Discounting and Relative Consumption (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:71:y:2015:i:c:p:19-33

DOI: 10.1016/j.jeem.2015.01.006

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