Technology Adoption and Long Discount Rates
38 Pages Posted: 27 Mar 2018 Last revised: 20 Feb 2020
Date Written: March 27, 2018
This paper studies long discount rates in a dynamic asset pricing model with a production side with multiple technologies. It introduces an R&D decision that endogenizes technological change while reproducing key features of the long-run risk literature. A pricing formula for capital strips is derived as an affine combination of discount factors analogous to defaultable bonds with zero recovery, where default corresponds to the event that the technology in place is abandoned for a new technology. 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. Results provide a novel framework for cost-benefit analysis and risk management in long-term projects like climate change mitigation.
Keywords: Endogenous R&D; Intensity control; Long-run risk; Long yields; Production economy; Technology adoption
JEL Classification: G10; G11; G12; O30
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