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Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates

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  • Ethan T. Addicott
  • Eli P. Fenichel
  • Matthew J. Kotchen

Abstract

We develop a demographic approach for estimating the utility discount rate (UDR) portion of the Ramsey rule. We show how age-specific mortality rates and life expectancies imply a natural, long-term UDR for individuals at each age, and these can be aggregated into a population-level social UDR. We provide estimates for nearly all countries and the world. Our estimates fall within the range of those currently employed in the literature, and the empirical basis of our methodology provides a useful point of comparison for alternative assumptions about the UDR. We use our results to derive heterogeneous social discount rates across countries and explore the consequences for an integrated assessment model of climate change. We find that introducing regional heterogeneity of UDRs into the RICE model has a small effect on the business-as-usual trajectory of global emissions, yet a more substantial effect on optimal emissions and the distributional burden of emission reductions.

Suggested Citation

  • Ethan T. Addicott & Eli P. Fenichel & Matthew J. Kotchen, 2020. "Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(2), pages 379-415.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/706885
    DOI: 10.1086/706885
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    Cited by:

    1. Lloyd-Smith, Patrick & Adamowicz, Wiktor & Entem, Alicia & Fenichel, Eli P. & Rouhi Rad, Mani, 2021. "The decade after tomorrow: Estimation of discount rates from realistic temporal decisions over long time horizons," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 158-174.
    2. Jarisch, Isabelle & Bödeker, Kai & Bingham, Logan Robert & Friedrich, Stefan & Kindu, Mengistie & Knoke, Thomas, 2022. "The influence of discounting ecosystem services in robust multi-objective optimization – An application to a forestry-avocado land-use portfolio," Forest Policy and Economics, Elsevier, vol. 141(C).
    3. Marian Leimbach & Nico Bauer, 2022. "Capital markets and the costs of climate policies," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 24(3), pages 397-420, July.
    4. Jinchi Dong & Richard S. J. Tol & Fangzhi Wang, 2024. "Towards a representative social cost of carbon," Papers 2404.04989, arXiv.org.

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