Sustainability in a Risky World

30 Pages Posted: 30 Mar 2021 Last revised: 21 Mar 2022

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Ian Martin

London School of Economics & Political Science (LSE) - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: March 18, 2022

Abstract

How much consumption is "sustainable"? We view sustainability as a requirement that welfare should not be expected to decline over time. We impose this requirement as a constraint on the consumption-savings-investment problem, and study its implications for saving, risky investment, and the social rate of time preference. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustainable rate of time preference and the sustainable consumption-wealth ratio, which we show must lie between the riskless interest rate and the expected return on optimally invested wealth. For plausible parameter values, the sustainable consumption-wealth ratio is considerably higher than both the riskless interest rate and the consumption-wealth ratio permitted by the Ramsey rule of zero social time preference.

Keywords: Sustainability, social discounting, consumption-wealth ratio, rate of time preference, Ramsey rule

JEL Classification: G11, H43, Q01

Suggested Citation

Campbell, John Y. and Martin, Ian W. R., Sustainability in a Risky World (March 18, 2022). Available at SSRN: https://ssrn.com/abstract=3815370 or http://dx.doi.org/10.2139/ssrn.3815370

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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Ian W. R. Martin

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/martiniw/

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