The Elasticity of Marginal Utility of Consumption: Estimates for 20 OECD Countries*

Abstract

In social project appraisal, the policy profile of both distributional welfare weights and the social discount rate has risen considerably in recent years. This fact has important implications for the allocation of funds to social projects and policies in countries, and in unions of countries such as the EU. A key component in the formulae for both welfare weights and the social discount rate is the elasticity of marginal utility of consumption, e. A critical review of existing evidence on e suggests that the UK Treasury's preferred value of unity is too low. New evidence presented in this paper, based on the structure of personal income tax rates, suggests that, on average, for developed countries e is close to 1.4. This particular approach to the estimation of e has previously been under‐utilised by researchers.

Using the stated preference method for the calculation of social discount rate

“…There are several methods for calculating each parameter, but most prevalent is a tax-based (mostly income tax) method for capturing the elasticity of the marginal utility of consumption (Evans 2005) and the use of GDP as growth rate.…”

The comparative importance for optimal climate policy of discounting, inequalities and catastrophes

“…We find that even if such damages occur with certainty, the difference in optimal prices across the three specifications is smaller than for varying the sub-regional distribution of mitigation cost or damage over a credible range. This is the case, as long as the inequality aversion parameter is greater than unity, on which most such studies agree (see Evans (2005) for estimates from OECD countries and Dasgupta (2008) for a theoretical overview). In fact, when the distribution of damage hurts the poor, the specifications with catastrophic damage barely affect the optimal price at all.…”

Intertemporal Evaluation Criteria for Climate Change Policy: Basic Ethical Issues

“…tax policy are transferred to the field of intergenerational distribution. The various studies on inequality aversion as expressed by income tax progressivity in a society suggest different values for η which sometimes lie in the interval between 1 and 2 (see Evans, D. (2005)) but are lower than 1 in other studies (see Atkinson, A. and Brandolini, A. (2010)).…”