Discounting, inequality and economic convergence

• Because of inequalities and heterogeneous growth prospects, there is no single discount rate.
• Permanent inequalities have no effect on the discount rate when risk aversion is constant.
• Economic convergence tends to raise the discount rate.
• If international inequalities are permanent, the discount rate should be around 2%.

The aim of this paper is to examine the impact of inequalities and economic convergence on the efficient discount rate when international credit and risk-sharing markets are inefficient. We consider an economy in which initial consumption levels and growth expectations are heterogeneous. In the benchmark case in which relative inequalities are permanent and relative risk aversion is constant, inequalities do not affect the discount rate. We derive necessary and sufficient conditions under which permanent inequalities reduce the discount rate. We also show that the anticipation of economic convergence raises the efficient discount rate when relative prudence is larger than unity.