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Very long-run discount rates

Author

Listed:
  • Giglio, Stefano

    (University of Chicago and NBER)

  • Maggiori, Matteo

    (New York University; NBER & CEPR)

  • Stroebel, Johannes

    (New York University)

Abstract

We provide direct estimates of how agents 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 U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices reflects the present value of perpetual rental income starting at leasehold expiry, 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 datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high present values 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. Given the riskiness of rents, this suggests that both long-run riskfree discount rates and long-run risk premia are low. We show how the estimated very long-run discount rates are informative for climate change policy.

Suggested Citation

  • Giglio, Stefano & Maggiori, Matteo & Stroebel, Johannes, 2014. "Very long-run discount rates," Globalization and Monetary Policy Institute Working Paper 182, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:182 DOI: 10.24149/gwp182 Note: Published as: Giglio, Stefano, Matteo Maggiori and Johannes Stroebel (2015), "Very Long-Run Discount Rates," The Quarterly Journal of Economics 130 (1): 1-53.
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    Cited by:

    1. Bracke, Philippe & Pinchbeck, Ted & Wyatt, James, 2014. "The time value of housing: historical evidence from London residential leases," LSE Research Online Documents on Economics 64504, London School of Economics and Political Science, LSE Library.
    2. Kollenberg, Sascha & Taschini, Luca, 2016. "Emissions trading systems with cap adjustments," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 20-36.
    3. Thomas Eisenbach & Martin Schmalz & Marianne Andries, 2015. "Asset Pricing with Horizon-Dependent Risk Aversion," 2015 Meeting Papers 1069, Society for Economic Dynamics.
    4. Moritz Drupp & Mark Freeman & Ben Groom & Frikk Nesje, 2015. "Discounting disentangled: an expert survey on the determinants of the long-term social discount rate," GRI Working Papers 196a, Grantham Research Institute on Climate Change and the Environment.
    5. Christoph Hambel & Holger Kraft & Eduardo Schwartz, 2015. "Optimal Carbon Abatement in a Stochastic Equilibrium Model with Climate Change," NBER Working Papers 21044, National Bureau of Economic Research, Inc.
    6. Hambel, Christoph & Kraft, Holger & Schwartz, Eduardo S., 2015. "Optimal carbon abatement in a stochastic equilibrium model with climate change," SAFE Working Paper Series 92, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    7. repec:eee:ecolec:v:143:y:2018:i:c:p:253-275 is not listed on IDEAS
    8. Koijen, Ralph & van Binsbergen, Jules H., 2015. "The Term Structure of Returns: Facts and Theory," CEPR Discussion Papers 10633, C.E.P.R. Discussion Papers.
    9. Andries, Marianne & Eisenbach, Thomas M. & Schmalz, Martin C., 2014. "Horizon-dependent risk aversion and the timing and pricing of uncertainty," Staff Reports 703, Federal Reserve Bank of New York, revised 01 Mar 2017.
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    11. Daniel Tortorice, 2015. "Long Run Expectations, Learning and the U.S. Housing Market," Working Papers 85, Brandeis University, Department of Economics and International Businesss School.
    12. Andries, Marianne & Eisenbach, Thomas M. & Schmalz, Martin C. & Wang, Yichuan, 2015. "The term structure of the price of variance risk," Staff Reports 736, Federal Reserve Bank of New York.
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    Keywords

    rental; income;

    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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