Valuation of extra-long investments – LONGTERMISM

Are we collectively too selfish, acting insufficiently for the well-being of future generations, or are we, on the contrary, too virtuous and too long-termist? These questions form the core of this research project, whose applications encompass the fight of climate change, socially responsible investments, the evaluation of public policies (investment in transportation, education, research, water or energy infrastructures), and the preservation of exhaustible natural resources and of biodiversity for example. Operationally, the myriad of associated decisions are decentralized through price signals (interest rates and risk premia) expressing the way our Society values investment projects, long-term saving products, long-dated assets, and more generally any action that transfers consumption and ecological services across generations. The main objective of the project is to provide operational tools associated to the problem of valuing the economic, financial, social and environmental impacts of our actions in favor of the distant future. We explore valuation models that encompass the modern theory of finance, which has a limited normative foundation and which does not account of the deep, non-normal uncertainties surrounding future generations. We will establish new pricing rules based on moral principles that are alternative to utilitarianism, with a richer representation the deep unknowns about the fate of humanity (Markov switches, black swans, fat tails, risk of secular stagnations or booms, etc). In particular, we will characterize the long-dated asset prices that are compatible with these alternative moral duties, and we will compare them to observed equilibrium prices. We will make recommendations about the discount rates and risk premia that should be used to evaluate public policies, corporate investments, and individual actions related to sustainable development.
Technically, our agenda of research will be at the frontier between finance, econometrics, public and environmental economics. We will rely on non-expected utility representations of intergenerational welfare, such as the one used in the emerging literature on Long-Run Risks (recursive preferences). In particular, we will explore the role of the timing of the resolution of uncertainty for the characterization of the term structures of socially desirable discount rates, covering the theoretical aspects and their econometric counterparts.