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Discounting and Relative Consumption

  • Johansson-Stenman, Olof

    ()

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Sterner, Thomas

    ()

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

We analyze optimal social discount rates when people derive utility from relative consumption. We compare the social, private, and conventional Ramsey rates. Assuming a positive growth rate, we find that 1) the social discount rate exceeds the private discount rate if the importance of relative consumption increases with consumption and that 2) the social discount rate is smaller than the Ramsey rate given quasi-concavity in own and others’ consumption and risk aversion with respect to others’ consumption. Numerical calculations demonstrate that the latter difference may be substantial and have important implications for long run environmental issues such as global warming.

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File URL: http://hdl.handle.net/2077/32520
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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 559.

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Length: 27 pages
Date of creation: 08 Mar 2013
Date of revision:
Handle: RePEc:hhs:gunwpe:0559
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Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden

Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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