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Very Long Run Discount Rates

Author

Listed:
  • Matteo Maggiori

    (NYU)

  • Johannes Stroebel

    (New York University)

  • Stefano Giglio

    (University of Chicago)

Abstract

We provide the first 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 find that very long-run discount rates are low, much lower than implied by most economic theory. We estimate these discount rates by exploiting a unique feature of residential housing markets in England, Wales and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, tradable ownership contracts with maturities between 50 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices represents the present value of perpetual rental income starting at leasehold expiry. We estimate the price discounts for varying leasehold maturities compared to freeholds 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 up to 15% less than otherwise identical freeholds. This suggests that both long-term risk-free discount rates and long- term risk premia are low. Together with the relatively high average return to housing, this also implies a downward sloping term structure of discount rates. Our results provide a new testing ground for asset-pricing theories, and have direct implications for climate-change policy, long-run fiscal policy and the conduct of cost-benefit analyses.

Suggested Citation

  • Matteo Maggiori & Johannes Stroebel & Stefano Giglio, 2014. "Very Long Run Discount Rates," 2014 Meeting Papers 1281, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:1281
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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.
    10. Strulik, Holger, 2017. "Hyperbolic discounting and the time-consistent solution of three canonical environmental problems," Center for European, Governance and Economic Development Research Discussion Papers 319, University of Goettingen, Department of Economics.
    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.
    13. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, Elsevier.

    More about this item

    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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