Sustainability in a risky world

John Y. Campbell and Ian Martin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: How much consumption is sustainable, if \sustainability" re- quires that welfare should not be expected to decline over time? We impose a sustainability constraint on a standard consump- tion/portfolio choice problem. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustain- able 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 H43 Q01 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2025-06-16
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Published in American Economic Review: Insights, 16, June, 2025, 7(2), pp. 196 - 212. ISSN: 2640-205X

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http://eprints.lse.ac.uk/126073/ Open access version. (application/pdf)

Related works:
Journal Article: Sustainability in a Risky World (2025)
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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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:126073

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