DP16219 Sustainability in a Risky World

Author(s): John Y Campbell, Ian Martin
Publication Date: June 2021
Keyword(s): Ramsay, Savings Rate, sustainability
Programme Areas: Financial Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16219

We view sustainability as a requirement that welfare should not be expected to decline over time. We impose this requirement as a prior constraint on the consumption-savings-investment problem, and study its implications for saving, risky investment, and the social discount rate. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustainable time preference rate and on the sustainable consumption-wealth ratio, which we show must lie between the riskless rate and the expected return on optimally invested wealth.