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New estimates of the elasticity of marginal utility for the UK

Groom, Ben and Maddison, David (2018) New estimates of the elasticity of marginal utility for the UK. Environmental and Resource Economics. ISSN 0924-6460

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Identification Number: 10.1007/s10640-018-0242-z

Abstract

This paper provides novel empirical evidence on the value of the elasticity of marginal utility, η, for the United Kingdom. η is a crucial component of the social discount rate (SDR), which determines the inter-temporal trade-offs that are acceptable to society. Using contemporaneous and historical data, new estimates are obtained using four revealed-preference techniques: the equal-sacrifice income tax approach, the Euler-equation approach, the Frisch additive-preferences approach and risk aversion in insurance markets. A meta-analysis indicates parameter homogeneity across approaches, and a central estimate of 1.5 for η. The confidence interval excludes unity, the value used in official guidance by the UK government. The term structure of the SDR is then estimated. The result is a short-run SDR of 4.5% declining to 4.2% in the very long-run. This is higher and flatter than the UK official guidance. The difference stems from incorrect calibration of social welfare and estimation of the diffusion of growth. Other things equal, the results suggest that current UK guidance might need to be updated.

Item Type: Article
Official URL: https://link.springer.com/journal/10640
Additional Information: © The Author(s) 2018
Divisions: Geography & Environment
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HN Social history and conditions. Social problems. Social reform
JEL classification: D - Microeconomics > D6 - Welfare Economics > D60 - General
D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency; Cost-Benefit Analysis
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies
R - Urban, Rural, and Regional Economics > R1 - General Regional Economics > R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies
Sets: Departments > Geography and Environment
Date Deposited: 18 Apr 2018 14:00
Last Modified: 20 Jul 2019 00:11
URI: http://eprints.lse.ac.uk/id/eprint/87526

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