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Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates

Author

Listed:
  • Eli P. Fenichel
  • Matthew J. Kotchen
  • Ethan T. Addicott

Abstract

We develop a demographically-based approach for estimating the utility discount rate (UDR) portion of the Ramsey rule. We show how age-specific mortality rates and life expectancies imply a natural UDR for individuals at each age in a population, and these can be aggregated into a population-level social UDR. We then provide empirical estimates for nearly all countries and for the world as a whole. A striking part of the analysis is how the estimated UDRs fall within the range of those currently employed in the macroeconomics and climate change literatures. We use our results to derive heterogenous social discount rates across countries and explore the consequences for an integrated assessment model of climate change. We find that introducing regional heterogeneity of UDRs into the RICE model has little impact on the business-as-usual trajectory of global emissions. It does, however, change the trajectory of optimal emissions, the corresponding optimal carbon tax, and the distribution of emission reductions across countries.

Suggested Citation

  • Eli P. Fenichel & Matthew J. Kotchen & Ethan T. Addicott, 2017. "Even the Representative Agent Must Die: Using Demographics to Inform Long-Term Social Discount Rates," NBER Working Papers 23591, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23591
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    Cited by:

    1. Gerlagh, Reyer & Jaimes, Richard & Motavasseli, Ali, 2017. "Global Demographic Change and Climate Policies," Other publications TiSEM 7a4ee2a9-e025-4ec0-8bc8-f, Tilburg University, School of Economics and Management.
    2. Lint Barrage, 2019. "The Nobel Memorial Prize for William D. Nordhaus," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(3), pages 884-924, July.
    3. Emmerling, Johannes & Groom, Ben & Wettingfeld, Tanja, 2017. "Discounting and the representative median agent," Economics Letters, Elsevier, vol. 161(C), pages 78-81.

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    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • O21 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Planning Models; Planning Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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