Social Discounting with Diminishing Returns on Investment
32 Pages Posted: 27 Dec 2007 Last revised: 21 Jan 2017
Date Written: January 16, 2017
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: Suggested Citation