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Discounting and Relative Consumption

Resources for the Future Discussion Paper No. 11-38

30 Pages Posted: 2 Jan 2012  

Olof Johansson-Stenman

Goeteborg University - School of Economics & Commercial Law

Thomas Sterner

Göteborg University - Department of Economics

Date Written: August 15, 2011

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

Suggested Citation

Johansson-Stenman, Olof and Sterner, Thomas, Discounting and Relative Consumption (August 15, 2011). Resources for the Future Discussion Paper No. 11-38. Available at SSRN: https://ssrn.com/abstract=1978519 or http://dx.doi.org/10.2139/ssrn.1978519

Olof Johansson-Stenman

Goeteborg University - School of Economics & Commercial Law ( email )

Box 640
SE 405 30 Goeteborg
Sweden
+46-31-773 25 38 (Phone)
+46-31-773 13 26 (Fax)

HOME PAGE: http://www.handels.gu.se/econ/EEU/johansso.htm

Thomas Sterner (Contact Author)

Göteborg University - Department of Economics ( email )

Göteborg
Sweden

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