Discounting and relative consumption

• We incorporate relative consumption effects into the theory of social discounting.
• We compare the social, private and Ramsey discount rates.
• The social discount rate tends to exceed the private one.
• The social discount rate tends to be lower than the Ramsey rate.
• Relative consumption effects are important for the economics of climate change.

We analyze optimal social discount rates when people derive utility from relative consumption, i.e. their own consumption level relative to the consumption level of others. We compare the social, private, and conventional Ramsey rates. Assuming a positive growth rate, we find that (1) the social discount rate exceeds the private discount rate if the importance of relative consumption increases with consumption, and that (2) the social discount rate is lower than the Ramsey rate given quasi-concavity in own and others’ consumption and risk aversion with respect to others’ consumption. Numerical calculations demonstrate that the latter difference may be substantial and have important implications for long run environmental issues such as global warming.