Social Discounting with Diminishing Returns on Investment

32 Pages Posted: 27 Dec 2007 Last revised: 21 Jan 2017

See all articles by Marc H. Vatter

Marc H. Vatter

Marc H. Vatter, Ph.D.; Elevation Direct; Economic Insight, Inc.; Brown University Dept. of Economics

Date Written: January 16, 2017

Abstract

I estimate the social discount rate allowing returns on investment to differ from returns on wealth. Historical returns on wealth and investment in the United States imply estimates of pure time preference and risk aversion, which I use to project returns going forward. I generalize the Ramsey Rule for optimal investment to account for any difference between rates of return on wealth and investment. Empirically, the rate of return on investment is below that on wealth, and both are declining, so drawing the distinction implies less investment as a fraction of income than under the original Ramsey Rule. The analysis suggests pure time preference of 1.02%, a descriptive social discount rate of 7.35%, and a prescriptive rate of 6.33%, based on my interpretation of the Biblical Golden Rule: zero pure time preference. This also implies an increase in investment over historical and projected rates of about 4% of GDP.

Keywords: discount, social, diminishing, return, wealth, investment

JEL Classification: H43, Q38, Q48, Q54

Suggested Citation

Vatter, Marc H., Social Discounting with Diminishing Returns on Investment (January 16, 2017). Available at SSRN: https://ssrn.com/abstract=1078502 or http://dx.doi.org/10.2139/ssrn.1078502

Marc H. Vatter (Contact Author)

Marc H. Vatter, Ph.D. ( email )

9 Underhill Street
Nashua, NH 03060-4060
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603.402.3433 (Phone)

HOME PAGE: http://appliedecon.net

Elevation Direct ( email )

3753 Howard Hughes Pkwy
Las Vegas, NV 89169
United States
208-946-9814 (Phone)

HOME PAGE: http://www.elevationdirect.com/

Economic Insight, Inc. ( email )

9 Underhill Street
Nashua, NH 03060-4060
United States
603.402.3433 (Phone)

HOME PAGE: http://appliedecon.net

Brown University Dept. of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-3836 (Phone)

HOME PAGE: http://www.brown.edu/Departments/Economics/

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