New Estimates of the Elasticity of Marginal Utility for the UK

• Published in: Environmental & resource economics Vol. 72; no. 4; pp. 1155 - 1182
• Main Authors: Groom, Ben, Maddison Pr, David
• Format: Journal Article
• Language: English
• Published: Dordrecht Springer Netherlands 01.04.2019; Springer Nature B.V
• Subjects: Aversion; Confidence intervals; Data; Economic models; Economic Policy; Economics; Economics and Finance; Elasticity; Empirical analysis; Environmental Economics; Environmental Law/Policy/Ecojustice; Environmental Management; Homogeneity; Income taxes; Insurance; Marginal utility; Markets; Risk; Risk aversion; Social welfare; Taxation; United Kingdom > UK; Cost–Benefit analysis; R13; Social discount rate; Elasticity of marginal utility; Social rate of time preference; H24; D61; D60
• ISSN: 0924-6460; 1573-1502
• DOI: 10.1007/s10640-018-0242-z

This paper provides novel empirical evidence on the value of the elasticity of marginal utility, η , for the United Kingdom. η is a crucial component of the social discount rate (SDR), which determines the inter-temporal trade-offs that are acceptable to society. Using contemporaneous and historical data, new estimates are obtained using four revealed-preference techniques: the equal-sacrifice income tax approach, the Euler-equation approach, the Frisch additive-preferences approach and risk aversion in insurance markets. A meta-analysis indicates parameter homogeneity across approaches, and a central estimate of 1.5 for η . The confidence interval excludes unity, the value used in official guidance by the UK government. The term structure of the SDR is then estimated. The result is a short-run SDR of 4.5% declining to 4.2% in the very long-run. This is higher and flatter than the UK official guidance. The difference stems from incorrect calibration of social welfare and estimation of the diffusion of growth. Other things equal, the results suggest that current UK guidance might need to be updated.