Sustainability in a risky world

Martin, Ian W. R. ORCID: 0000-0001-8373-5317 and Campbell, John Y. (2024) Sustainability in a risky world. American Economic Review: Insights. ISSN 2640-205X (In Press)

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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
Additional Information:	© 2024
Divisions:	Finance
Date Deposited:	14 Nov 2024 09:48
Last Modified:	14 Nov 2024 11:51
URI:	http://eprints.lse.ac.uk/id/eprint/126073

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