2019-1-18

Intergenerational Discounting with Intragenerational Inequality in Consumption and the Environment

Yamaguchi Rintaro

Information of Paper

Intergenerational Discounting with Intragenerational Inequality in Consumption and the Environment

Author: Yamaguchi Rintaro
Year:2018
Journal:Environmental and Resource Economics, forth coming

Link to the paper

Keywords

Discounting; Income distribution; Intragenerational equity; Climate change

Abstract

It is now established that the consumption discount rate is determined by the growth of consumption multiplied by the elasticity of marginal utility, but distributive concerns are rarely reflected in the literature. Assuming a social welfare function with inequality aversion, we consider a consumption discount rate that can be decomposed into the growth effect and the intragenerational distribution effect. The framework is then extended to include population change and inequality in the environment as an amenity in a utility with constant elasticity of substitution. Numerical examples illustrate that distributional effects turn non-negligibly negative, that may reduce consumption discount rate by 1–3% for plausible parameters, once distribution is adjusted for both population and the environment.

fig1. decomposition of a consumption discount rate
Fig1. Decomposition of a consumption discount rate into growth and population-adjusted intragenerational distribution effects of consumption and the environment, when the environmental distribution matches consumption distribution

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