Discounting and Relative Consumption

Abstract

This paper analyzes optimal social discount rates where people derive utility from relative consumption. We identify and compare three separate discount rates: the social rate (taking positional externalities into account), the private rate, and the conventional Ramsey rate. Two main findings resulted for the standard case with a positive growth rate: 1) the social discount rate exceeds the private discount rate if the degree of positionality increases with consumption, and 2) the social discount rate is smaller than the Ramsey rate if preferences are quasi-concave in own and reference consumption, and exhibit risk aversion with respect to reference consumption. Numerical calculations demonstrate that the latter difference may be substantial and economically important for such issues as global warming.

Keywords: discounting, relative consumption, Ramsey rule, degree of positionality, keeping up with the Joneses

JEL Classification: D63, D90, H43