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The Social Discount Rate

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The Social Discount Rate Discussion Paper 137 Institute for Empirical Macroeconomics Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis, Minnesota 55480-0291 January 2001 The Social Discount Rate Andrew Caplin* New York University John Leahy* Boston University ABSTRACT __________________________________________________________________________ In welfare theory it is standard to pick the consumption stream that maximizes the welfare of the repre- sentative agent. We argue against this position, and show that a benevolent social planner will generally place a greater weight on future consumption than does the representative agent. _____________________________________________________________________________________ *We thank Andy Abel, Marco Basseto, Susanto Basu, Gary Becker, Ed Glaeser, Jeffrey Campbell, Jean-Jacques Laf- font, David Laibson, Robert Lucas Jr., Casey Mulligan, Barry Nalebuff, Mario Rizzo, Nancy Stokey, Robert Solow, and Lars Svensson for helpful comments and discussions. Caplin thanks the C. V. Starr Center at NYU and Leahy thanks the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. ïUU@tðL?@**) |üihi ü@ñi Mii? |üLti êüL ü@ñi ñLðUi_ _ðtUL4uLh| êð|ü |üðt ThitUhðT|ðL?c itTiUð@**) |üLti tii!ð?} |L Lhði?| TýM*ðU TL*ðU) 4Lhi |Lê@h_t |üi uý|ýhië +@4ti) d•b2Hoc êüð*i @U!?Lê*i_}ð?} |ü@| Thðñ@|i @}i?|t _ðtULý?| |üi uý|ýhic @h}ýi_ |ü@| ð| ê@t Ri|üðU@**) ð?_iui?tðM*iâ uLh |üi }Lñih?4i?| |L _L tLë èð}Lý d•bD2oc ú**@ðt d•be.oc @?_ 5L*Lê d•b.eo ü@ñi i Thitti_ tð4ð*@h ñðiêtë 6Lh |üi 4Lt| T@h|c üLêiñihc |üiti ñðiêt ü@ñi ið|üih Mii? ð}?Lhi_ Lh _ðt4ðtti_ @t T@|ih?@*ðt|ðU M) |üi 4@éLhð|) Lu iUL?L4ðt|të úhhLê @?_ kýh3 d•b.fo U@T|ýhi |üi uii*ð?}t Lu |üi ThLuittðL? êüi? |üi) êhð|iG W| ðt ü@h_ |L tii êü) |üi hiñi@*i_ Thiuihi?Ui Lu ð?_ðñð_ý@*t tüLý*_ Mi _ðthi}@h_i_ ð? |üi hi@*4 Lu |ð4ic êüihi ð| ðt @UUiT|i_c MhL@_*) tTi@!ð?}c ð? iñ@*ý@|ð?} Uýhhi?| UL44L_ð|) ãLêtë ETë •2ä W? |üðt T@Tih êi @h}ýi @}@ð?t| Uýhhi?| Th@U|ðUic @?_ ð? u@ñLh Lu |üi 4Lhi uý|ýhiíLhði?|i_ ñðtðL?ë AL ð44ý?ð3i Lýhti*ñit uhL4 Uü@h}it Lu T@|ih?@*ðt4c êi hi|@ð? @ t|@?_@h_ ý|ð*ð|@hð@? @TThL@Uü |L iñ@*ý@|ð?} tLUð@* êi*u@hië `i tüLê |ü@| tLUð@* êi*u@hi ULhhitTL?_t |L |üi @}i?|<t ý|ð*ð|) L?*) ý?_ih ñih) tTiUð@* UL?_ð|ðL?të W?t|i@_c @ Mi?iñL*i?| tLUð@* T*@??ih êð** }i?ih@**) T*@Ui @ }hi@|ih êið}ü| L? uý|ýhi UL?tý4T|ðL?ë Aüi 4@ð? 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