The Ramsey Rule
The Ramsey Rule
This chapter presents the main argument in favor of a positive discount rate. In a growing economy, future generations will consume more goods and services than we do. In this context, investing for the future is equivalent to asking poor consumers to sacrifice more of their consumption for the benefit for wealthier people. Because of inequality aversion, one would be ready to do so only if the rate of return of these investment projects is large enough to compensate for the increased intertemporal inequalities that these projects would generate. The Ramsey rule quantifies this wealth effect. In fact, several experts have used the Ramsey rule to make recommendations on the choice of the discount rate to evaluate public policies, in particular toward climate change.
Keywords: Ramsey rule, positive discount rate, consumption, inequality aversion, intertemporal inequalities, public policies
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