Missing Participants, Missing Markets, and the Social Discount Rate: Borrowing Constraints, Intergenerational Transfers, Altruism, and the Desire for Legacy

Abstract

Market interest rates reflect the preferences of market participants. When market participants are missing, the average discount rate in the population may therefore differ from the market rate. Missing current market participants, such as constrained borrowers, tends to imply an average discount rate that is above the market rate, whereas missing future market participants, such as future generations, tends to imply an average rate below the market rate. Nonetheless, a government with the ability to transfer wealth intratemporally across agents will generally wish to use the market interest rate as a guide to policy. One robust argument for the use of a lower social discount rate is intrapersonal: Future selves discount the past, whereas current selves discount the future. Legacy utility may also justify a low social discount rate. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.