IDEAS home Printed from https://ideas.repec.org/p/fau/wpaper/wp2021_03.html

Elasticity of Marginal Utility of Consumption: The Equal-Sacrifice Approach Applied for the Czech Republic

Author

Listed:
  • Matej Opatrny

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic
    Environmental Centre, Charles University, Czech Republic)

  • Milan Scasny

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic
    Environmental Centre, Charles University, Czech Republic)

Abstract

We provide the first estimate of the elasticity of marginal utility of consumption, ?, for a post-transition economy in the Central & Eastern European region, the Czech Republic, based on individual-level data. The parameter ? is a crucial component of the social discount rate (SDR), which determines the inter-temporal allocations that are acceptable to society. Using the equal-sacrifice income tax approach, we obtain a central estimate of ? at 1.34, which varies between 1.24 and 1.42 within the study period that covers 2005-2019. Moreover, the estimate of elasticity of marginal utility of consumption differs between various income groups and employment status. Importantly, the magnitude of ? estimate depends on whether social benefits are included into gross income or social and health insurance payments are included in the definition of taxes. Our results suggest that SDR for the Czech Republic may be around 3-5 percent for a reasonable pure rate of time preference and positive forecast for per capita consumption growth.

Suggested Citation

  • Matej Opatrny & Milan Scasny, 2021. "Elasticity of Marginal Utility of Consumption: The Equal-Sacrifice Approach Applied for the Czech Republic," Working Papers IES 2021/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2021.
    • Handle: RePEc:fau:wpaper:wp2021_03
    as

    Download full text from publisher

    File URL: https://ies.fsv.cuni.cz/sites/default/files/uploads/files/wp_2021_03_scasny%2C%20opatrny.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stern, Nicholas, 2022. "A time for action on climate change and a time for change in economics," LSE Research Online Documents on Economics 113456, London School of Economics and Political Science, LSE Library.
    2. Fujii, Tomoki & Karp, Larry, 2008. "Numerical analysis of non-constant pure rate of time preference: A model of climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 56(1), pages 83-101, July.
    3. Breeden, Douglas T., 1986. "Consumption, production, inflation and interest rates : A synthesis," Journal of Financial Economics, Elsevier, vol. 16(1), pages 3-39, May.
    4. Anil Markandya & Enrica Cian & Laurent Drouet & Josué M. Polanco-Martínez & Francesco Bosello, 2019. "Building Risk into the Mitigation/Adaptation Decisions simulated by Integrated Assessment Models," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(4), pages 1687-1721, December.
    5. Moritz A. Drupp & Mark C. Freeman & Ben Groom & Frikk Nesje, 2018. "Discounting Disentangled," American Economic Journal: Economic Policy, American Economic Association, vol. 10(4), pages 109-134, November.
    6. Richard Blundell & Martin Browning & Costas Meghir, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 57-80.
    7. David J. Evans, 2005. "The elasticity of marginal utility of consumption: estimates for 20 OECD countries," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 197-224, June.
    8. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    9. Havranek, Tomas & Horvath, Roman & Irsova, Zuzana & Rusnak, Marek, 2015. "Cross-country heterogeneity in intertemporal substitution," Journal of International Economics, Elsevier, vol. 96(1), pages 100-118.
    10. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 171-186, December.
    11. Spackman, Michael, 2020. "Social Discounting and the Cost of Public Funds: A Practitioner’s Perspective," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 11(2), pages 244-271, July.
    12. Ben Groom & Moritz A. Drupp & Mark C. Freeman & Frikk Nesje, 2022. "The Future, Now: A Review of Social Discounting," Annual Review of Resource Economics, Annual Reviews, vol. 14(1), pages 467-491, October.
    13. Loïc Berger & Johannes Emmerling, 2020. "Welfare As Equity Equivalents," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 727-752, September.
    14. Landis, Florian & Fredriksson, Gustav & Rausch, Sebastian, 2021. "Between- and within-country distributional impacts from harmonizing carbon prices in the EU," Energy Economics, Elsevier, vol. 103(C).
    15. Timothy Park & John B. Loomis & Michael Creel, 1991. "Confidence Intervals for Evaluating Benefits Estimates from Dichotomous Choice Contingent Valuation Studies," Land Economics, University of Wisconsin Press, vol. 67(1), pages 64-73.
    16. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 911-928.
    17. Elminejad, Ali & Havranek, Tomas & Irsova, Zuzana, 2022. "People Are Less Risk-Averse than Economists Think," CEPR Discussion Papers 17411, Centre for Economic Policy Research.
    18. Berliant, Marcus & Gouveia, Miguel, 1993. "Equal sacrifice and incentive compatible income taxation," Journal of Public Economics, Elsevier, vol. 51(2), pages 219-240, June.
    19. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
    20. Yamaguchi, Rintaro & Shah, Payal, 2020. "Spatial discounting of ecosystem services," Resource and Energy Economics, Elsevier, vol. 62(C).
    21. John Y. Campbell, 1986. "Bond and Stock Returns in a Simple Exchange Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 785-803.
    22. Young, H. P., 1987. "Progressive taxation and the equal sacrifice principle," Journal of Public Economics, Elsevier, vol. 32(2), pages 203-214, March.
    23. Nicholas Stern, 2022. "A Time for Action on Climate Change and a Time for Change in Economics," The Economic Journal, Royal Economic Society, vol. 132(644), pages 1259-1289.
    24. Anna Alberini & Milan Ščasný, 2021. "On the validity of the estimates of the VSL from contingent valuation: Evidence from the Czech Republic," Journal of Risk and Uncertainty, Springer, vol. 62(1), pages 55-87, February.
    25. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 537-579.
    26. Howard Reed & Mike Dixon, 2005. "National Insurance: Does it Have a Future?," Public Policy Review, Institute for Public Policy Research, vol. 12(2), pages 102-110, June.
    27. Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ben Groom & David Maddison Pr., 2019. "New Estimates of the Elasticity of Marginal Utility for the UK," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(4), pages 1155-1182, April.
    2. Milan Scasny & Matej Opatrny, 2022. "New Estimate of the Elasticity of Marginal Utility of Consumption for Europe: Implications for the Social Discount Rate," Working Papers IES 2022/29, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Dec 2022.
    3. Monika Foltyn-Zarychta & Rafał Buła & Krystian Pera, 2021. "Discounting for Energy Transition Policies—Estimation of the Social Discount Rate for Poland," Energies, MDPI, vol. 14(3), pages 1-21, January.
    4. Louis Kaplow & David Weisbach, 2011. "Discount rates, social judgments, individuals’ risk preferences, and uncertainty," Journal of Risk and Uncertainty, Springer, vol. 42(2), pages 125-143, April.
    5. Rick Van der Ploeg, 2020. "Discounting And Climate Policy," OxCarre Working Papers 244, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    6. Isoré, Marlène & Szczerbowicz, Urszula, 2017. "Disaster risk and preference shifts in a New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 97-125.
    7. Holger Strulik, 2021. "Hyperbolic discounting and the time‐consistent solution of three canonical environmental problems," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(3), pages 462-486, June.
    8. Cropper, Maureen, 2012. "How Should Benefits and Costs Be Discounted in an Intergenerational Context?," RFF Working Paper Series dp-12-42, Resources for the Future.
    9. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    10. Alessandro Bucciol & Raffaele Miniaci, 2011. "Household Portfolios and Implicit Risk Preference," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1235-1250, November.
    11. Antonio Nesticò & Gabriella Maselli & Patrizia Ghisellini & Sergio Ulgiati, 2023. "A Dual Probabilistic Discounting Approach to Assess Economic and Environmental Impacts," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 85(1), pages 239-265, May.
    12. Gollier, Christian, 2004. "The Consumption-Based Determinants of the Term Structure of Discount Rates," IDEI Working Papers 296, Institut d'Économie Industrielle (IDEI), Toulouse.
    13. repec:sus:susewp:0724 is not listed on IDEAS
    14. Grubb, Michael & Lange, Rutger-Jan & Cerkez, Nicolas & Sognnaes, Ida & Wieners, Claudia & Salas, Pablo, 2024. "Dynamic determinants of optimal global climate policy," Structural Change and Economic Dynamics, Elsevier, vol. 71(C), pages 490-508.
    15. Justin W. van de Ven, 2017. "Parameterising a detailed dynamic programming model of savings and labour supply using cross-sectional data," International Journal of Microsimulation, International Microsimulation Association, vol. 10(1), pages 135-166.
    16. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 171-186, December.
    17. Buchholz, Wolfgang & Schumacher, Jan, 2010. "Discounting and welfare analysis over time: Choosing the [eta]," European Journal of Political Economy, Elsevier, vol. 26(3), pages 372-385, September.
    18. Jasper N. Meya & Stefan Baumgärtner & Moritz A. Drupp & Martin F. Quaas, 2020. "Inequality and the Value of Public Natural Capital," CESifo Working Paper Series 8752, CESifo.
    19. Tymon Słoczyński, 2012. "Zastosowanie zasady równych ofiar do oceny sprawiedliwości taryfy podatku dochodowego od osób fizycznych (PIT) w Polsce," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 10, pages 23-47.
    20. Takeshi Yagihashi & Juan Du, 2023. "Intertemporal elasticity of substitution with leisure margin," Review of Economics of the Household, Springer, vol. 21(4), pages 1473-1504, December.
    21. Rafał Buła & Monika Foltyn-Zarychta, 2022. "Declining Discount Rates for Energy Policy Investments in CEE EU Member Countries," Energies, MDPI, vol. 16(1), pages 1-27, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fau:wpaper:wp2021_03. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Natalie Svarcova (email available below). General contact details of provider: https://edirc.repec.org/data/icunicz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.