Sustainability in a risky world

Campbell, John Y. and Martin, Ian W. R. ORCID: 0000-0001-8373-5317 (2025) Sustainability in a risky world. American Economic Review: Insights, 7 (2). 196 - 212. ISSN 2640-205X

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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.

Item Type:	Article
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions
JEL classification:	D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth H - Public Economics > H4 - Publicly Provided Goods > H43 - Project Evaluation; Social Discount Rate Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q0 - General > Q01 - Sustainable Development
Date Deposited:	14 Nov 2024 09:48
Last Modified:	01 Jul 2025 03:06
URI:	http://eprints.lse.ac.uk/id/eprint/126073

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