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Sustainability in a Risky World

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  • John Y. Campbell
  • Ian Martin

Abstract

How much consumption is sustainable, if \sustainability" requires that welfare should not be expected to decline over time? We impose a sustainability constraint on a standard consumption/portfolio choice problem. The constraint does not distort port- folio choice, but it imposes an upper bound on the sustainable consumption-wealth ratio, which must lie between the riskless interest rate and the expected return on wealth (and if risky capital evolves according to a geometric Brownian motion, it lies exactly halfway between the two). Sustainability requires an upward drift in wealth and consumption to compensate future generations for the increased risk they face.

Suggested Citation

  • John Y. Campbell & Ian Martin, 2021. "Sustainability in a Risky World," NBER Working Papers 28899, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28899
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    References listed on IDEAS

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    1. Kenneth Arrow & Partha Dasgupta & Lawrence Goulder & Gretchen Daily & Paul Ehrlich & Geoffrey Heal & Simon Levin & Karl-Göran Mäler & Stephen Schneider & David Starrett & Brian Walker, 2004. "Are We Consuming Too Much?," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 147-172, Summer.
    2. Solow, Robert, 1993. "An almost practical step toward sustainability," Resources Policy, Elsevier, vol. 19(3), pages 162-172, September.
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    Cited by:

    1. Martin, Ian W. R., 2025. "Information in derivatives markets: forecasting prices with prices," LSE Research Online Documents on Economics 128212, London School of Economics and Political Science, LSE Library.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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