Technology Traps and Long Discount Rates

40 Pages Posted: 27 Mar 2018 Last revised: 9 Feb 2021

Date Written: March 27, 2020

Abstract

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

Prieto, Rodolfo, Technology Traps and Long Discount Rates (March 27, 2020). Available at SSRN: https://ssrn.com/abstract=3150552 or http://dx.doi.org/10.2139/ssrn.3150552

Rodolfo Prieto (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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