Siblings, Not Triplets: Social Preferences for Risk, Inequality and Time in Discounting Climate Change

29 Pages Posted: 18 Dec 2010

See all articles by Giles Atkinson

Giles Atkinson

London School of Economics and Political Science (LSE) - Department of Geography and Environment

Simon Dietz

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment

Jennifer Helgeson

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment

Cameron J. Hepburn

London School of Economics, Grantham Research Institute

Hakon Saelen

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

Arguments about the appropriate discount rate often start by assuming a Utilitarian social welfare function with isoelastic utility, in which the consumption discount rate is a function of the (constant) elasticity of marginal utility along with the (much discussed) utility discount rate. In this model, the elasticity of marginal utility simultaneously reflects preferences for intertemporal substitution, aversion to risk, and aversion to (spatial) inequality. While these three concepts are necessarily identical in the standard model, this need not be so: well-known models already enable risk to be separated from intertemporal substitution. Separating the three concepts might have important implications for the appropriate discount rate, and hence also for long-term policy. This paper investigates these issues in the context of climate-change economics, by surveying the attitudes of over 3000 people to risk, income inequality over space and income inequality over time. The results suggest that individuals do not see the three concepts as identical, and indeed that preferences over risk, inequality and time are only weakly correlated. As such, relying on empirical evidence of risk or inequality preferences may not necessarily be an appropriate guide to specifying the elasticity of intertemporal substitution.

Keywords: Climate change, discounting, risk aversion, intertemporal substitution, inequality aversion, intergenerational equity

JEL Classification: Q51, C90, D01, D63

Suggested Citation

Atkinson, Giles and Dietz, Simon and Helgeson, Jennifer and Hepburn, Cameron J. and Saelen, Hakon, Siblings, Not Triplets: Social Preferences for Risk, Inequality and Time in Discounting Climate Change (2009). Economics Discussion Paper No. 2009-14. Available at SSRN: https://ssrn.com/abstract=1726713 or http://dx.doi.org/10.2139/ssrn.1726713

Giles Atkinson (Contact Author)

London School of Economics and Political Science (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Simon Dietz

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/dietzs

Jennifer Helgeson

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

Cameron J. Hepburn

London School of Economics, Grantham Research Institute ( email )

Houghton Street
London, WC2A 2AE
Great Britain

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

Hakon Saelen

affiliation not provided to SSRN

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