Discount rate/Tutorials

The Ramsey equation

The social time preference rate, s, is given by:-

s = δ + ηg

where:

δ is the pure time preference rate (otherwise known as the utility discount rate);

η is the elasticity of marginal utility with respect to consumption; and,

g is the expected future growth rate of consumption.

Evidence based upon the structure of personal income tax rates suggests that the value of η for most developed countries is close to 1.4