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Long-run Discounting: Applications to Climate Change Policies
May 14, 2015Macro, Trade, and Finance Seminar Series

Stefano Giglio (Chicago Booth) will share the results of recent research.

Speaker: Stefano Giglio is an Assistant Professor of Finance at the University of Chicago Booth School of Business. More »

Abstract: We provide direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices reflects the present value of perpetual rental income starting at leasehold expiry, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high present values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims. Given the riskiness of rents, this suggests that both long-run risk-free discount rates and long-run risk premia are low. We show how the estimated very long-run discount rates are informative for climate change policy.

PaperVery Long-Run Discount Rates (jointly written by Matteo Maggiori (Harvard University) and Johannes Stroebel (NYU Stern)


Last Updated: May 11, 2015

The Macro, Trade, and Finance Seminar Series is a weekly series hosted by the World Bank's research department. The series invites leading researchers from the fields of macroeconomics, growth, trade, international integration, and finance to present the results of their most recent research in a seminar format. The full list of seminars can be viewed here.

Event Details
  • Date: May 14, 2015
  • Location: World Bank Main Complex, MC10-100
  • Time: 12:30 - 2:00 p.m.
  • CONTACT: Shweta Mesipam
  • smesipam@worldbank.org