Discussion on the Social Rate of Discount: from Sen to Behavioural Economics

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionSince the issue of preserving the natural capital and the equitable sharing of it for current and future generations is a matter of global concern (Sankar, 2011, p. 4), governments worldwide are looking for a proper, sustainable management approach to the commons (cf., e.g. the recent Paris Agreement that sets out a global action plan aiming at avoiding dangerous climate change). It should be however noted that reaching intergenerational equity demands first establishing a compromise of how we measure and compare welfare of our and future generations. Simply put, all intergenerational equity decisions can be traced back to the choice of social rate of discount (SRD).The social rate of discount has been defined as the rate at which the society is willing to postpone current consumption for more consumption in the (near or even far) future (Marglin, 1963; Sen, 1967). The choice of SRD is a challenging task because it involves, among others, an assessment of future benefits to be received by other people. Observe that a choice of SRD concerns two dimensions: (i) the temporal dimension (future benefits) and (ii) the social distance dimension (benefits for others). Therefore, the economic discussion related to the social rate of discount involves two types of discounting: (i) time (also known as delay or temporal) discounting (see, e.g. Frederick et al., 2002) and (ii) social discounting (see, e.g. Jones and Rachlin, 2006).In the case of time discounting, decision makers value rewards available at various moments in time (choices are made within a time horizon, hence the choice is intertemporal). As regards social discounting, the choices made concern rewards to people occupying various positions along the axis of social distance (choices are made within a social distance horizon, hence the choice is interpersonal). Persons are distributed along the social distance axis according to the criterion of diminishing proximity to the decision maker. The decision maker occupies position no. 1, then there is the person closest to her (in this text decision makers are in the feminine), whereas further along the axis there are people known to the decision maker only by sight, and further on - strangers.Observe that the intergenerational choice is entangled both in intertemporal and interpersonal considerations. Obviously, this makes the choice being discussed particularly complex and perplexing.The aim of this paper is to, at least to some extent, disentangle the complexity of the intergenerational problem by presenting important voices in the economic discussion on the social rate of discount. This survey paper puts special emphasis on the contributions made by Amartya K. Sen (section 2) in the development of theory of social rate of discount. As shown in further sections, the works of Sen (1961, 1967, 1982) considerably broadened the standard approach (discounted utility model, see section 1) to the topic as well as significantly affected economic discussion in that area for years to come. Brief presentation of the discounted utility model and its implications is a first research task of this paper. Sen's research paved the way that was later followed by behavioural economists studying (both individual and national) differences in rates of discount as well as social conditions underlying the SRD selection process (section 3). The concise elaboration of research findings of (i) Sen and (ii) behavioural economists comprises two remaining research tasks of this paper.The highly complex SRD-related issues can be organised by using the fundamental descriptive dimensions of economic agent (cf. Figure 1). The basic dimensions distinguished in the economic concept of man are (Hendrikse, 2003): decision maker's degree of rationality, behavioural orientation and willpower. In neoclassical economics humans are believed to be fully rational (degree of rationality axis, cf. …