Discounting and the representative median agent

Johannes Emmerling, Ben Groom and Tanja Wettingfield

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

Abstract: We derive a simple formula for the social discount rate (SDR) that uses the median, rather than average agent of the economy to reect 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 reects 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: F3 G3 (search for similar items in EconPapers)
Date: 2017-09-29
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Citations: View citations in EconPapers (9)

Published in Economics Letters, 29, September, 2017, 161, pp. 78-81. ISSN: 0165-1765

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Related works:
Journal Article: 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:ehl:lserod:84859

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