Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/46364
Authors: 
Gollier, Christian
Year of Publication: 
2010
Series/Report no.: 
CESifo working paper: Industrial Organisation 3262
Abstract: 
The aim of this paper is to examine the impact of inequalities and economic convergence on the efficient discount rate, in the absence of any risk-sharing scheme. We consider an economy in which the initial consumption level and the distribution of consumption growth are heterogeneous. The benchmark case is when inequalities are permanent and relative risk aversion is constant. The discount rate is not affected by inequalities in that case. We first relax the assumption on risk aversion, and we derive conditions under which permanent inequalities reduce the discount rate. If relative prudence is larger than unity, an increase in economic convergence always raises the efficient discount rate. In a realistic calibration exercise, we show that the effect of economic convergence is to triple the discount rate, from less 2% to more than 6%.
Subjects: 
prudence
temperance
concordance
discount rate
JEL: 
G00
Document Type: 
Working Paper

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