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Very long-run discount rates

Stefano Giglio (), Matteo Maggiori () and Johannes Stroebel

No 182, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We provide direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices reflects the present value of perpetual rental income starting at leasehold expiry, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high present values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims. Given the riskiness of rents, this suggests that both long-run riskfree discount rates and long-run risk premia are low. We show how the estimated very long-run discount rates are informative for climate change policy.

Keywords: rental; income (search for similar items in EconPapers)
JEL-codes: G11 G12 R30 (search for similar items in EconPapers)
Pages: 156 pages
Date: 2014-05-01
New Economics Papers: this item is included in nep-sea
Note: Published as: Giglio, Stefano, Matteo Maggiori and Johannes Stroebel (2015), "Very Long-Run Discount Rates," The Quarterly Journal of Economics 130 (1): 1-53.
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Working Paper: Very Long-Run Discount Rates (2014) Downloads
Working Paper: Very Long-Run Discount Rates (2014) Downloads
Working Paper: Very Long Run Discount Rates (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:182

DOI: 10.24149/gwp182

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