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Discounting, Inequalities and Economic Convergence

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  • Christian Gollier

Abstract

The aim of this paper is to examine the impact of inequalities and economic convergence on the efficient discount rate, in the absence of any risk-sharing scheme. We consider an economy in which the initial consumption level and the distribution of consumption growth are heterogeneous. The benchmark case is when inequalities are permanent and relative risk aversion is constant. The discount rate is not affected by inequalities in that case. We first relax the assumption on risk aversion, and we derive conditions under which permanent inequalities reduce the discount rate. If relative prudence is larger than unity, an increase in economic convergence always raises the efficient discount rate. In a realistic calibration exercise, we show that the effect of economic convergence is to triple the discount rate, from less 2% to more than 6%.

Suggested Citation

  • Christian Gollier, 2010. "Discounting, Inequalities and Economic Convergence," CESifo Working Paper Series 3262, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3262
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp3262.pdf
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    References listed on IDEAS

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    1. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
    2. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
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    Cited by:

    1. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2014. "Precautionary saving under many risks," Journal of Economics, Springer, vol. 113(3), pages 211-228, November.
    2. Tol, Richard S. J., 2011. "Modified Ramsey Discounting for Climate Change," Papers WP368, Economic and Social Research Institute (ESRI).
    3. Michel Denuit & Béatrice Rey, 2014. "Benchmark values for higher order coefficients of relative risk aversion," Theory and Decision, Springer, vol. 76(1), pages 81-94, January.

    More about this item

    Keywords

    prudence; temperance; concordance; discount rate;

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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