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How Do Households Discount over Centuries? Evidence from Singapore's Private Housing Market

Listed author(s):
  • Fesselmeyer, Eric

    ()

    (National University of Singapore)

  • Liu, Haoming

    ()

    (National University of Singapore)

  • Salvo, Alberto

    ()

    (National University of Singapore)

We examine Singapore's fairly homogeneous private-housing market and show that new apartments on historical multi-century leases trade at a non-zero discount relative to property owned in perpetuity. Descriptive regressions indicate that new apartments with 825 to 986 years of tenure remaining are priced 4 to 6% below new apartments under perpetual ownership contracts that are otherwise comparable. We consider an empirical model in which asset value is decomposed into the utility of housing services and a second factor that shifts with asset tenure and the discount rate schedule. Exploiting the supply of new property with tenure ranging from multiple decades to multiple centuries, we estimate the discount rate schedule, restricting it to vary smoothly over time through alternative parametric forms. Across different specifications and subsamples, we estimate discount rates that decline over time and, accounting for the observed price differences, are of the order of 0.5% p.a. by year 400-500. The finding that households making sizable transactions do not entirely discount benefits accruing many centuries from today is new to the empirical literature on discounting and, with the appropriate risk adjustment, of relevance to evaluating climate-change investments.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 9862.

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Length: 63 pages
Date of creation: Apr 2016
Handle: RePEc:iza:izadps:dp9862
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  1. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
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  13. Arrow, K. & Cropper, M. & Gollier, C. & Groom, B. & Heal, G. & Newell, R. & Nordhaus, W. & Pindyck, R. & Pizer, W. & Portney, P. & Sterner, T. & Tol, R. S. J. & Weitzman, Martin L., 2013. "Determining Benefits and Costs for Future Generations," Scholarly Articles 12841963, Harvard University Department of Economics.
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