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Discounting and the representative median agent

Emmerling, Johannes, Groom, Ben and Wettingfield, Tanja (2017) Discounting and the representative median agent. Economics Letters, 161. pp. 78-81. ISSN 0165-1765

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Identification Number: 10.1016/j.econlet.2017.09.031

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.

Item Type: Article
Official URL: https://www.journals.elsevier.com/economics-letter...
Additional Information: © 2017 Elsevier B.V.
Divisions: Geography & Environment
Subjects: H Social Sciences > HG Finance
H Social Sciences > HN Social history and conditions. Social problems. Social reform
Sets: Departments > Geography and Environment
Date Deposited: 19 Oct 2017 09:29
Last Modified: 30 Jan 2019 20:57
Projects: 642147
Funders: Horizon 2020
URI: http://eprints.lse.ac.uk/id/eprint/84859

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