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Editor's Choice Very Long-Run Discount Rates

Author

Listed:
  • Stefano Giglio
  • Matteo Maggiori
  • Johannes Stroebel

Abstract

We estimate how households trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the United Kingdom and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, prepaid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The price difference between leaseholds and freeholds reflects the present value of perpetual rental income starting at leasehold expiration, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary data sets of the universe of transactions in each country. Households discount very long-run cash flows at low rates, assigning high present value to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims. JEL Codes: G11, G12, R30.

Suggested Citation

  • Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2015. "Editor's Choice Very Long-Run Discount Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 130(1), pages 1-53.
  • Handle: RePEc:oup:qjecon:v:130:y:2015:i:1:p:1-53
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    File URL: http://hdl.handle.net/10.1093/qje/qju036
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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