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Discounting and relative consumption

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  • Johansson-Stenman, Olof
  • Sterner, Thomas

Abstract

We analyze optimal social discount rates when people derive utility from relative consumption, i.e. their own consumption level relative to the consumption level of others. We compare the social, private, and conventional Ramsey rates. Assuming a positive growth rate, we find that (1) the social discount rate exceeds the private discount rate if the importance of relative consumption increases with consumption, and that (2) the social discount rate is lower than the Ramsey rate given quasi-concavity in own and others’ consumption and risk aversion with respect to others’ consumption. Numerical calculations demonstrate that the latter difference may be substantial and have important implications for long run environmental issues such as global warming.

Suggested Citation

  • Johansson-Stenman, Olof & Sterner, Thomas, 2015. "Discounting and relative consumption," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 19-33.
  • Handle: RePEc:eee:jeeman:v:71:y:2015:i:c:p:19-33 DOI: 10.1016/j.jeem.2015.01.006
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    Cited by:

    1. Terence C. Burnham, 2016. "Economics and evolutionary mismatch: humans in novel settings do not maximize," Journal of Bioeconomics, Springer, pages 195-209.
    2. 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.

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    Keywords

    Environmental discounting; Global warming; Relative consumption; Ramsey rule; Positionality;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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