New estimates of the elasticity of marginal utility for the UK

Research output: Contribution to journalArticlepeer-review

Authors

Colleges, School and Institutes

External organisations

  • London School of Economics and Political Science, The (LSE)

Abstract

This paper provides novel empirical evidence on the value of the elasticity of marginal utility, , for the United Kingdom. is a crucial component of the social discount rate (SDR), which determines the inter-temporal trade-offs that are acceptable to society. Using contemporaneous and historical data, new estimates are obtained using four revealed-preference techniques: the equal-sacrifice income tax approach, the Euler-equation approach, the Frisch additive-preferences approach and risk aversion in insurance markets. A meta-analysis indicates parameter homogeneity across approaches, and a best-guess estimate of 1.5 for . The confidence interval excludes unity, the value used in official guidance by the UK government. The term structure of the SDR is then estimated. The result is a short-run SDR of 4.5 percent declining to 4.2 percent in the very long-run. This is higher and flatter than the UK official guidance. The difference stems from incorrect calibration of social welfare and estimation of the diffusion of growth. The results suggest that current UK guidance might need to be updated.

Details

Original languageEnglish
Pages (from-to)1155–1182
Number of pages28
JournalEnvironmental and Resource Economics
Volume72
Early online date30 Mar 2018
Publication statusPublished - 1 Apr 2019

Keywords

  • Elasticity of Marginal Utility, Social Rate of Time Preference, Social Discount Rate, Cost Benefit Analysis