Working Paper: NBER ID: w28899
Authors: John Y. Campbell; Ian Martin
Abstract: How much consumption is “sustainable”? We view sustainability as a requirement that welfare should not be expected to decline over time. We impose this requirement as a constraint on the consumption-savings-investment problem, and study its implications for saving, risky investment, and the social rate of time preference. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustainable rate of time preference and the sustainable consumption-wealth ratio, which we show must lie between the riskless interest rate and the expected return on optimally invested wealth (and if risky wealth evolves according to a geometric Brownian motion, it must lie exactly halfway between the two). For plausible parameter values, the sustainable consumption-wealth ratio is considerably higher than both the riskless interest rate and the consumption-wealth ratio permitted by the Ramsey rule of zero social time preference.
Keywords: sustainability; social rate of time preference; risk; investment; consumption
JEL Codes: G11; Q01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sustainability constraint (Q01) | expected utility derived from consumption over time (D11) |
| higher individual time preferences (D15) | adherence to the sustainability constraint (Q01) |
| sustainable consumption-wealth ratio (E21) | sustainability constraint (Q01) |
| sustainability constraint (Q01) | riskless interest rate (E43) |
| sustainable consumption-wealth ratio (E21) | expected return on optimally invested wealth (G11) |