Social Discounting with Diminishing Returns on Investment

Abstract

I estimate the social discount rate allowing returns on investment to differ from returns on wealth. The rate of return on investment is below that on wealth, and both are declining. U.S. data imply pure time preference of 1% and relative risk aversion of 3, which I use to project returns going forward. The analysis suggests a descriptive social discount rate of 7.1%, and a prescriptive rate of 6.1%. Zero pure time preference implies only a modest increase in investment over historical and projected rates.