Siblings, not triplets: social preferences for risk, inequality and time in discounting climate change
AbstractArguments about the appropriate discount rate often start by assuming a Utilitarian social welfare function with isoelastic utility, in which the consumption discount rate is a function of the (constant) elasticity of marginal utility along with the (much discussed) utility discount rate. In this model, the elasticity of marginal utility simultaneously reflects preferences for intertemporal substitution, aversion to risk, and aversion to (spatial) inequality. While these three concepts are necessarily identical in the standard model, this need not be so: well-known models already enable risk to be separated from intertemporal substitution. Separating the three concepts might have important implications for the appropriate discount rate, and hence also for long-term policy. This paper investigates these issues in the context of climate-change economics, by surveying the attitudes of over 3000 people to risk, income inequality over space and income inequality over time. The results suggest that individuals do not see the three concepts as identical, and indeed that preferences over risk, inequality and time are only weakly correlated. As such, relying on empirical evidence of risk or inequality preferences may not necessarily be an appropriate guide to specifying the elasticity of intertemporal substitution. --
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2009-14.
Date of creation: 2009
Date of revision:
Climate change; discounting; risk aversion; intertemporal substitution; inequality aversion; intergenerational equity;
Other versions of this item:
- Helgeson, Jennifer & Dietz, Simon & Atkinson, Giles D. & Hepburn, Cameron & Sælen, Håkon, 2009. "Siblings, not triplets: social preferences for risk, inequality and time in discounting climate change," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(26), pages 1-28.
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-14 (All new papers)
- NEP-ENE-2009-03-14 (Energy Economics)
- NEP-ENV-2009-03-14 (Environmental Economics)
- NEP-UPT-2009-03-14 (Utility Models & Prospect Theory)
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