IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v161y2017icp78-81.html
   My bibliography  Save this article

Discounting and the representative median agent

Author

Listed:
  • Emmerling, Johannes
  • Groom, Ben
  • Wettingfeld, Tanja

Abstract

We derive a simple formula for the social discount rate (SDR) that uses the median, rather than average agent of the economy to reflect 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 reflects two decades of inequality-increasing growth and implies greater weight placed on future generations in public appraisal.

Suggested Citation

  • Emmerling, Johannes & Groom, Ben & Wettingfeld, Tanja, 2017. "Discounting and the representative median agent," Economics Letters, Elsevier, vol. 161(C), pages 78-81.
    • Handle: RePEc:eee:ecolet:v:161:y:2017:i:c:p:78-81
    DOI: 10.1016/j.econlet.2017.09.031
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176517303981
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2017.09.031?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ben Groom & Cameron Hepburn, 2017. "Reflections—Looking Back at Social Discounting Policy: The Influence of Papers, Presentations, Political Preconditions, and Personalities," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(2), pages 336-356.
    2. Nolan, Brian & Thewissen, Stefan & Roser, Max, 2016. "GDP per capita versus median household income: What gives rise to divergence over time?," INET Oxford Working Papers 2016-03, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    3. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801.
    4. Richard S. J. Tol, 2010. "International Inequity Aversion And The Social Cost Of Carbon," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 21-32.
    5. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    6. Timothy Besley & Miguel Coelho & John Van Reenen, 2013. "Investing for Prosperity: Skills, Infrastructure and Innovation," National Institute Economic Review, National Institute of Economic and Social Research, vol. 224(1), pages 1-13, May.
    7. Kenneth J. Arrow & Maureen L. Cropper & Christian Gollier & Ben Groom & Geoffrey M. Heal & Richard G. Newell & William D. Nordhaus & Robert S. Pindyck & William A. Pizer & Paul R. Portney & Thomas Ste, 2014. "Editor's Choice Should Governments Use a Declining Discount Rate in Project Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(2), pages 145-163.
    8. Amartya Sen, 1976. "Real National Income," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(1), pages 19-39.
    9. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
    10. Emmerling, Johannes, 2018. "Discounting and intragenerational equity," Environment and Development Economics, Cambridge University Press, vol. 23(1), pages 19-36, February.
    11. Sterner, Thomas & Tol, Richard S. J. & Weitzman, Martin L. & Pizer, William A. & Portney, Paul R. & Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newe, 2014. "Should Governments Use a Declining Discount Rate in Project Analysis?," Scholarly Articles 33373349, Harvard University Department of Economics.
    12. Andrews, Rodney & Casey, Marcus & Hardy, Bradley L. & Logan, Trevon D., 2017. "Location matters: Historical racial segregation and intergenerational mobility," Economics Letters, Elsevier, vol. 158(C), pages 67-72.
    13. Xavier Sala-i-Martin, 2006. "The World Distribution of Income: Falling Poverty and … Convergence, Period," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 351-397.
    14. Eli P. Fenichel & Matthew J. Kotchen & Ethan T. Addicott, 2017. "Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates," NBER Working Papers 23591, National Bureau of Economic Research, Inc.
    15. Gollier, Christian, 2015. "Discounting, inequality and economic convergence," Journal of Environmental Economics and Management, Elsevier, vol. 69(C), pages 53-61.
    16. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
    17. Maxim Pinkovskiy & Xavier Sala-i-Martin, 2009. "Parametric Estimations of the World Distribution of Income," NBER Working Papers 15433, National Bureau of Economic Research, Inc.
    18. Federico Cingano, 2014. "Trends in Income Inequality and its Impact on Economic Growth," OECD Social, Employment and Migration Working Papers 163, OECD Publishing.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rintaro Yamaguchi, 2019. "Intergenerational Discounting with Intragenerational Inequality in Consumption and the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 957-972, August.
    2. van der Ploeg, Frederick & Emmerling, Johannes & Groom, Ben, 2022. "The Social Cost of Carbon with Intragenerational Inequality under Economic Uncertainty," RFF Working Paper Series 22-08, Resources for the Future.
    3. Drupp, Moritz A. & Meya, Jasper N. & Baumgärtner, Stefan & Quaas, Martin F., 2017. "Economic inequality and the value of nature," Economics Working Papers 2017-08, Christian-Albrechts-University of Kiel, Department of Economics.
    4. Quaas, Martin F. & Baumgärtner, Stefan & Drupp, Moritz A. & Meya, Jasper N., 2020. "Intertemporal utility with heterogeneous goods and constant elasticity of substitution," Economics Letters, Elsevier, vol. 191(C).
    5. Moritz A. Drupp & Ulrike Kornek & Jasper N. Meya & Lutz Sager, 2021. "Inequality and the Environment: The Economics of a Two-Headed Hydra," CESifo Working Paper Series 9447, CESifo.
    6. Frederick van der Ploeg & Johannes Emmerling & Ben Groom, 2023. "The Social Cost of Carbon with Intragenerational Inequality and Economic Uncertainty," Discussion Papers 2301, University of Exeter, Department of Economics.
    7. Venmans, Frank & Groom, Ben, 2021. "Social discounting, inequality aversion, and the environment," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    8. Frikk Nesje & Moritz A. Drupp & Mark C. Freeman & Ben Groom, 2022. "Philosophers and Economists Can Agree on the Intergenerational Discount Rate and Climate Policy Paths," CESifo Working Paper Series 9930, CESifo.
    9. Jasper N. Meya & Stefan Baumgärtner & Moritz A. Drupp & Martin F. Quaas, 2020. "Inequality and the Value of Public Natural Capital," CESifo Working Paper Series 8752, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frederick van der Ploeg & Johannes Emmerling & Ben Groom, 2023. "The Social Cost of Carbon with Intragenerational Inequality and Economic Uncertainty," Discussion Papers 2301, University of Exeter, Department of Economics.
    2. Yamaguchi, Rintaro & Shah, Payal, 2020. "Spatial discounting of ecosystem services," Resource and Energy Economics, Elsevier, vol. 62(C).
    3. Rick van der Ploeg & Johannes Emmerling & Ben Groom, 2022. "The Social Cost of Carbon with Intragenerational Inequality under Economic Uncertainty," CESifo Working Paper Series 9777, CESifo.
    4. Hänsel, Martin C. & Quaas, Martin F., 2018. "Intertemporal Distribution, Sufficiency, and the Social Cost of Carbon," Ecological Economics, Elsevier, vol. 146(C), pages 520-535.
    5. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    6. David Anthoff & Johannes Emmerling, 2019. "Inequality and the Social Cost of Carbon," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(2), pages 243-273.
    7. Frederick Ploeg, 2021. "Carbon pricing under uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1122-1142, October.
    8. Rick van der Ploeg, 2020. "Discounting and Climate Policy," CESifo Working Paper Series 8441, CESifo.
    9. Loïc Berger & Johannes Emmerling, 2020. "Welfare As Equity Equivalents," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 727-752, September.
    10. DeCanio, Stephen J. & Manski, Charles F. & Sanstad, Alan H., 2022. "Minimax-regret climate policy with deep uncertainty in climate modeling and intergenerational discounting," Ecological Economics, Elsevier, vol. 201(C).
    11. Richard S.J. Tol, 2018. "The impact of climate change and the social cost of carbon," Working Paper Series 1318, Department of Economics, University of Sussex Business School.
    12. Therese C. Grijalva & Jayson L. Lusk & Rong Rong & W. Douglass Shaw, 2018. "Convex Time Budgets and Individual Discount Rates in the Long Run," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(1), pages 259-277, September.
    13. Holger Strulik, 2021. "Hyperbolic discounting and the time‐consistent solution of three canonical environmental problems," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(3), pages 462-486, June.
    14. Piacquadio, Paolo G., 2020. "The ethics of intergenerational risk," Journal of Economic Theory, Elsevier, vol. 186(C).
    15. Yongyang Cai, 2020. "The Role of Uncertainty in Controlling Climate Change," Papers 2003.01615, arXiv.org, revised Oct 2020.
    16. Ben Groom & David Maddison Pr., 2019. "New Estimates of the Elasticity of Marginal Utility for the UK," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(4), pages 1155-1182, April.
    17. Fleurbaey, Marc & Zuber, Stéphane, 2015. "Discounting, risk and inequality: A general approach," Journal of Public Economics, Elsevier, vol. 128(C), pages 34-49.
    18. Gouriéroux, C. & Monfort, A. & Renne, J.-P., 2022. "Required Capital for Long-Run Risks," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    19. Morten Nyborg Støstad & Frank Cowell, 2021. "Inequality as an Externality: Consequences for Tax Design," PSE Working Papers halshs-03495989, HAL.
    20. Moritz A. Drupp & Martin C. Hänsel, 2021. "Relative Prices and Climate Policy: How the Scarcity of Nonmarket Goods Drives Policy Evaluation," American Economic Journal: Economic Policy, American Economic Association, vol. 13(1), pages 168-201, February.

    More about this item

    Keywords

    Social discount rate; Income inequality; Inequality aversion; Cost benefit analysis;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:161:y:2017:i:c:p:78-81. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.