Technology Traps and Long Discount Rates
40 Pages Posted: 27 Mar 2018 Last revised: 9 Feb 2021
Date Written: March 27, 2020
I study long discount rates in a dynamic asset pricing model with a production side with multiple technologies and an R&D decision that endogenizes technological change. A pricing formula for capital strips is derived as an affine combination of discount factors analogous to defaultable bond prices with zero recovery. The far distant future is discounted at the lowest possible adoption-adjusted rate. This rate is characterized by quantities in a trap, a hard-to-exit state with low productivity. My results provide a novel framework for evaluating long-term projects like climate change mitigation, and a new rationale for early action.
Keywords: Endogenous R&D; Intensity control; Long-run risk; Long yields; Production economy; Technology adoption
JEL Classification: G10; G11; G12; O30
Suggested Citation: Suggested Citation