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

Author

Listed:
  • Andrew Caplin

    (Department of Economics and Center for Experimental Social Science, New York University, New York, NY, USA)

  • John Leahy

    (Department of Economics and Gerald R. Ford School of Public Policy, University of Michigan, Ann Arbor, Michigan, USA)

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.

Suggested Citation

  • Andrew Caplin & John Leahy, 2023. "Missing Participants, Missing Markets, and the Social Discount Rate: Borrowing Constraints, Intergenerational Transfers, Altruism, and the Desire for Legacy," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 165-184, November.
    • Handle: RePEc:anr:refeco:v:15:y:2023:p:165-184
    DOI: 10.1146/annurev-financial-101822-112948
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    More about this item

    Keywords

    social discount rate; incomplete markets; altruism; legacy;
    All these keywords.

    JEL classification:

    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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