Intergenerational Discounting with Intragenerational Inequality in Consumption and the Environment

It is now established that the consumption discount rate is determined by the growth of consumption multiplied by the elasticity of marginal utility, but distributive concerns are rarely reflected in the literature. Assuming a social welfare function with inequality aversion, we consider a consumpti...

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Bibliographic Details
Published in:Environmental & resource economics 2019-08, Vol.73 (4), p.957-972
Main Author: Yamaguchi, Rintaro
Format: Article
Language:English
Subjects:
Aversion
Consumption
Demographic change
Discount rates
Discounting
Economic models
Economic Policy
Economics
Economics and Finance
Elasticity
Environmental Economics
Environmental Law/Policy/Ecojustice
Environmental Management
Inequality
Marginal utility
Social welfare
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Summary:It is now established that the consumption discount rate is determined by the growth of consumption multiplied by the elasticity of marginal utility, but distributive concerns are rarely reflected in the literature. Assuming a social welfare function with inequality aversion, we consider a consumption discount rate that can be decomposed into the growth effect and the intragenerational distribution effect. The framework is then extended to include population change and inequality in the environment as an amenity in a utility with constant elasticity of substitution. Numerical examples illustrate that distributional effects turn non-negligibly negative, that may reduce consumption discount rate by 1–3% for plausible parameters, once distribution is adjusted for both population and the environment.
ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-018-0282-4