External Publications
2017.09
Date: 29/09/2017

Discounting and the representative median agent


Authors:
Johannes Emmerling (Fondazione Eni Enrico Mattei, Centro-Euro Mediterraneo per i Cambiamenti Climatici CMCC); Ben Groom (Department of Geography and Environment - London School of Economics and Political Science); Tanja Wettingfeld (Committee on Climate Change)
Type: Journal
Published in: Economics Letters, Volume 161, 78-81

Abstract

We derive a simple formula for the social discount rate (SDR) that uses the median, rather than average agent of the economy to reflect the consequences of consumption growth on income inequality. Under reasonable assumptions, the difference between the growth of median and mean incomes is used to adjust the wealth-effect in the standard Ramsey rule. In a plausible special case the representative agent has the median income. With inequality aversion elasticity of 2 (1.5, 1), the U.K. and U.S. SDR would be 1% (0.5%, 0.25%) lower than the standard Ramsey rule. This reflects two decades of inequality-increasing growth and implies greater weight placed on future generations in public appraisal.

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Discounting and the representative median agent

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