Very Long-Run Discount Rates

106 Pages Posted: 28 Oct 2013 Last revised: 3 Nov 2014

See all articles by Stefano Giglio

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Matteo Maggiori

Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Johannes Stroebel

New York University (NYU); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2, 2014

Abstract

We estimate how households trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The price difference between leaseholds and freeholds reflects the present value of perpetual rental income starting at leasehold expiry, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Households discount very long-run cash flows at low rates, assigning high present value to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims.

Keywords: Cost-Benefit Analysis, Asset Pricing, Environmental Economics, Climate Change, Real Estate, House Prices Risk and Return

JEL Classification: G11, G12, R30

Suggested Citation

Giglio, Stefano and Maggiori, Matteo and Stroebel, Johannes, Very Long-Run Discount Rates (November 2, 2014). Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2346049 or http://dx.doi.org/10.2139/ssrn.2346049

Stefano Giglio

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Matteo Maggiori

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Johannes Stroebel (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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