Ethical asset valuation and the good society

C H R I ST I A N G O L L I E R E CT HRI CEAAT L AI SNSGE T A L E A R N I N G VALUATION AND THE S O C I E T Y GOOD SOCIETY ETHICAL ASSET VALUATION AND THE GOOD SOCIETY KENNETH J ARROW LECTURE SERIES KENNETH J ARROW LECTURE SERIES Kenneth J Arrow’s work has so deeply shaped the course of economics for the past sixty years that, in a sense, every modern economist is his student His ideas, style of research, and breadth of vision have been a model for generations of the boldest, most creative, and most innovative economists His work has yielded seminal theorems in areas such as general equilibrium theory, social choice theory, and endogenous growth theory, proving that simple ideas have profound effects The Kenneth J Arrow Lecture Series highlights economists from Nobel laureates to groundbreaking younger scholars, whose work builds on Arrow’s scholarship as well as his innovative spirit The books in the series are an expansion of the lectures that are held in Arrow’s honor at Columbia University The lectures have been supported by Columbia University’s Committee on Global Thought, Program for Economic Research, Center on Global Economic Governance, and Initiative for Policy Dialogue Creating a Learning Society: A New Approach to Growth, Development, and Social Progress, Joseph E Stiglitz and Bruce C Greenwald The Arrow Impossibility Theorem, Eric Maskin and Amartya Sen Speculation, Trading, and Bubbles, José A Scheinkman Moral Hazard in Health Insurance, Amy Finkelstein Creating a Learning Society: A New Approach to Growth, Development, and Social Progress, Reader’s Edition, Joseph E Stiglitz and Bruce C Greenwald Discovering Prices: Auction Design in Markets with Complex Constraints, Paul Milgrom ETHICAL ASSET VALUATION AND THE GOOD SOCIETY CHRISTIAN GOLLIER COLUMBIA UNIVERSITY PRESS | NEW YORK Columbia University Press Publishers Since 1893 New York  Chichester, West Sussex cup.columbia.edu Copyright © 2018 Columbia University Press All rights reserved Library of Congress Cataloging-in-Publication Data Names: Gollier, Christian, author Title: Ethical asset valuation and the good society / Christian Gollier Description: New York : Columbia University Press, [2018] | Series: Kenneth J Arrow lecture series | Includes bibliographical references Identifiers: LCCN 2017020978 (print) | LCCN 2017035360 (ebook) | ISBN 9780231545921 | ISBN 9780231170420 (alk paper) Subjects: LCSH: Capital market—Moral and ethical aspects | Securities—Prices | Value | Valuation | Public good Classification: LCC HG4523 (ebook) | LCC HG4523 G655 2018 (print) | DDC 174/.4—dc23 LC record available at https://lccn.loc.gov/2017020978 Columbia University Press books are printed on permanent and durable acid-free paper Printed in the United States of America Cover design: Noah Arlow CONTENTS Acknowledgments vii Introduction xi COLLECTIVE ASPIRATIONS CHOICE AND MEASURE OF VALUES DO WE DO ENOUGH FOR THE FUTURE? IS THE WORLD TOO RISKY? Conclusion 179 Technical Appendix 187 Notes 191 Bibliography 193 Index 203 125 23 71 ACKNOWLEDGMENTS T his book is the outcome of a fifteen-year long personal research agenda, mostly performed on my own at the Toulouse School of Economics However, the results I discuss here are linked to various papers I wrote with co-authors: Jacques Drèze, Louis Eeckhoudt, Harris Schlesinger, Jean Tirole, Nicolas Treich, Mart in Weitzman, and Richard Zeckhauser Their contributions are gratefully acknowledged My debt to Jacques Drèze goes back to the 1980s when, as a student at the Center for Operations Research and Econometrics (CORE) in Louvain, I attended his enthusiastic and profound lectures on the economics of uncertainty But my intellectual interest in discount rates came later; I can trace it back to the Institut d’Economie Industrielle (IDEI) lecture about the economics of climate change given by Kenneth Arrow in 1995 Since then, my curiosity about discounting and sustainable development has grown, reinforced by my interaction with many public and private institutions that have struggled with these complex questions In the public sphere, let me mention France Stratégie, the Conseil ACKNOWLEDGMENTS Economique du Développement Durable, the French Ministry of Ecology, and various foreign public institutions in the United States (the Environmental Protection Agency), the Netherlands, the United Kingdom, and Norway I have also benefited from frequent enquiries from and interactions with economists from Electricité de France, Engie, and Réseau de Transport d’Electricité, among others This project was also supported by various partners of the Toulouse School of Economics and IDEI, in the partners of the chair “Sustainable Finance and Responsible Investment,” and the French reinsurance company SCOR, which funded the chair “Risk Markets and Value Creation” at IDEI More recently, Amundi and Meridiam, two financial institutions interested in the concepts of responsible finance, have also contributed to this research agenda On a more personal note, this book is in keeping with my own intellectual evolution and history My father, who wrote a book entitled The Future of Pensions ( J.-J Gollier 1987), was interested in the same questions He was a prominent actuary who advised the Belgian government in the 1980s and 1990s about the pension reforms that were necessary in the face of huge anticipated pension deficits set to hit at the turn of the century My vocation as an economist is intrinsically linked to this intellectual heritage, my youth having been haunted by discussions about the implicit debt that my father’s generation was imposing on mine, and about the necessity to save for the long term This book is in line with my father’s and my intergenerational quest for long-term economic thinking Q viii Q ACKNOWLEDGMENTS I thank Bridget Flannery-McCoy at Columbia University Press for her very useful comments and advice on an earlier version of this manuscript Finally, I wrote this book in 2016 and early 2017 as I was visiting the economics department of Columbia University as the Wesley Clair Mitchell visiting research professor and the economics department of University College London Their hospitality is greatly appreciated Q ix Q BIBLIOGRAPHY Sidgwick, H 1890 The Methods of Ethics London: Macmillan Solow, R M 1974 “The Economics of Resources or the Resources of Economics.” American Economic Review 64 (2): 1–14 Stern, N 1977 “The Marginal Valuation of Income.” In Studies in Modern Economic Analysis, edited by M Artis and A Nobay Oxford: Blackwell —— 2007 The Economics of Climate Change: The Stern Review Cambridge: Cambridge University Press Stiglitz, J.E., and A Weiss 1981 “Credit Rationing in Markets with Imperfect Information.” American Economic Review 71: 393–410 Summers, L H 2014 “U.S Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound.” Business Economics 49: 65–73 Tirole, J 2006 The Theory of Corporate Finance Princeton, NJ: Princeton University Press Traeger, C P 2011 “Sustainability, Limited Substitutability and Non-Constant Social Discount Rates.” Journal of Environmental Economics and Management 62 (2): 215–28 Von Neumann, J., and O Morgenstern 1947 Theory of Games and Economic Behavior 2nd ed Princeton, NJ: Princeton University Press Weil, P 1989 “The Equity Premium Puzzle and the Risk-Free Rate Puzzle.” Journal of Monetary Economics 24: 401–21 Weitzman, M L 1998 “Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate,” Journal of Environmental Economics and Management 36 (3): 201–208 —— 2001 “Gamma Discounting.” American Economic Review 91: 260–71 —— 2007a “A Review of the Stern Review on the Economics of Climate Change.” Journal of Economic Literature 45: 703–24 —— 2007b “Subjective Expectations and Asset-Return Puzzles.” American Economic Review 97: 1102–30 Q 201 Q INDEX Acemoglu, D., 192n2 Africa, xxii ageism, 20 Allais, Maurice, 8, 11 Allais paradox, 11 allocation: competitive, 63; credit markets and, 80; efficiency and, 35; fairness and, 35–36; Kaldor–Hicks compensation criterion and, 48; Pareto efficient and, 37; veil of ignorance and, 16 altruism, 62 See also intergenerational altruism Amazon, 126 Andersson, M., 66 anticompetitive behavior, 34 Arrow, Kenneth, 20, 125, 162 Arrow-Lind theorem, 130–31, 133, 137 Arrow-Pratt approximation, 128 asset pricing theory, xix, 109–11, 150–54 Atkinson, A B., 54, 145 aversion index, 56, 56, 57 See also risk aversion baby boomers, xi bailouts, xiii Bangladesh, 24, 47, 181 Bansal, R., 99, 146 Barro, R J., 113, 148 Barsky, R J., 145 Bazacle Company of Toulouse, 131 Benabou, R., 43 benefits: diversification and, 129, 130; future generations and, 122; risk-free, 163; social, xv, 50–51, 65; socioeconomic, 158, 159, 160, 170; of socioeconomic beta, 158; unemployment benefits and, 39 See also cost–benefit analysis Bernoulli, Daniel, INDEX Bernoulli, Jakob, 104 big gain, bills, 75 See also government bills black swans, 112–15 Bolton, P., 66 bonds, xix See also government bonds; Treasury bonds Bonnefon, Jean-Franỗois, Broome, J., 145 Brownian: motion of, 112, 124, 187; problem with, 98; process of, 94; uncertainty and, 149; volatility and, 102; world of, 93–96 business cycles, 99–101 cap-and-trade, 161 capital: cost of, xiv, 69; developing countries and, 79; frictionless economy and, xiv; household demand for, 87; human capital and, 40; natural capital and, 167–69; opportunity cost of, 73–77; risky investments and, 139; for supply and demand, 72 See also normative capital; private capital; safe capital capital asset pricing model (CAPM), xix, 154 capital-intensive industries, xxiv–xxv capitalism, xi, 180 capital liberalism, 23 CAPM See capital asset pricing model Q carbon cost, 161–67 carbon dioxide emissions, 170, 182; cap-and-trade and, 161; Germany and, 159; investments and, 73; risk-adjusted discount rate and, 161 carbon tax, 65, 66 Cherbonnier, Frédéric, 159 China, xviii, 97 climate beta: carbon cost and, 161–67; insurance and, 163; proponents for, 166 climate change, xxvi, 84; decision maker and, 21; externalities and, 39; future generations and, 165; future of, 163; infrastructure and, xxviii; long-termism and, 161; R&D and, 73; sensitivity for, 166; technology and, 169; uncertainty and, 171 collective action, 18, 47 collective aspiration, 150 collective beliefs, 151 collective good, xx collective long-termism, xviii collective risk: consumption and, 136; hedging of, 176; penalties for, 134–37; risk aversion and, 135, 147–50 commodities: consumers and, 26; consumption and, 30; problems of, 31 compensation, 29, 43 competition: fairness and, 60; frictionless economy and, 34; valuation and, 34–37 204 Q INDEX competitive allocation, 63 competitive equilibrium, 34; consumers and, 36; intergenerational welfare and, 81; Pareto efficient and, 35; social welfare and, 37 competitive markets, 38 Concert of Nations, xxvii conjoined triplet, 145 conspicuous goods, 41 consumers: commodities and, 26; competitive equilibrium and, 36; interest rate and, 75; sovereignty of, 25–27 consumption, 27; aggregate of, 120; behavior for, 51; collective risk and, 136; commodities and, 30; dynamics of, 100; equations for, 128; externalities of, 41; fat tails and, 110; future of, 90, 110; growth rate model of, 104, 147; households and, 75; increasing of, 138; independence axiom and, 127; inequality aversion and growth of, 123; marginal utility and, 30; market power and, 34; monetary value and, 33; real growth rate of, 84; transfer and, 109; value judgment and, 14; volatility of, 101 consumption-based capital, 138–39, 142 COP 21 See United Nations Climate Change Conference Q cost–benefit analysis, 22, 184; aspects of, 47–52; bypassing of, 118; democracy and, xxv; financial valuation and, xxiv; inequality and, 54; Kaldor–Hicks compensation criterion and, 50; paternalism and, 61; prioritarianism and, 17; production and, 33; risk and, 116; risk aversion and, 125; statistical life and, 46; theory of, 169; tool of, xxix; uncertainty and, 176; utilitarianism and, 15–16; valuation and, 170; welfare economics and, xxv cost of capital, xiv, 69 costs, xxiii Council of Economic Advisors, 71 credit markets: allocation and, 80; failures of, 78–80; investments and, 78; solvency ratio and, 79 Cropper, M L., 46 Davis, L W., 45 decentralized economy: future of, 180; interest rate and, 71; investment decisions in, 177 decentralized society, xii, xiii decision criterion, 22 decision maker, 7–8, 11, 21 Delpla, Jacques, 83 demand See supply and demand democracy, xxv developing countries, 79 205 Q INDEX Diamond, P., 80 Dietz, S., 164 discounted utility, 18–22, 19 discount rate, 162; Arrow-Lind theorem and, 137; booms and recessions of, 100; cash flow and, 103; lowering of, 124; maturity and, 114; prudence and, 106; risk-free rate puzzle and, 95; of social desirability, 95, 98 See also risk-free discount rate disinvestment, 65 distributive justice, 53–62 diversification, 129, 130; benefits and, 129, 130 diversified portfolio, xvii, 141 divesting: cost of capital and, 69; from fossil fuels, 67; from market capitalization, 67; portfolio and, 68 Drèze, J H., 57 Drupp, M., 163 Dutch book, 12 ecological discounting, 116–19 economic growth: China and, 97; collective benefit for, 176; GDP and, 96; Industrial Revolution and, 88; intergenerational inequality and, 83–85; international perspective of, 96–99; level of, 101–3; riskfree discount rate and, 123, 147; throughout history and, 88; uncertainty and, 103–4; volatility and, 108 Q economics, xxv; challengers of, xxi; Harsanyi and, 3; social choice theory and, xx; subfields of, xx See also macroeconomics economic theory, 5–8 economist: bad habits of, 101; finance researchers and, 169; risk aversion and, 125 economy: future of, 114; income distribution and, 36; market economy, xxvi; scare capital and, xiv; socially responsible investor and, 65 See also decentralized economy; frictionless economy education, 28 Eeckhoudt, L., 90 efficiency: allocation and, 35; criterion for, 48; fairness and, 35; values and, 42 efficient wages, 69 egalitarian community, 2, 18 employment, 40 entrepreneurs, xvi, 52 environment: assets of, 117; life expectancy and, 61; natural capital and, 167–68; uncertainty and, 118–19; wellbeing and, 119 Environmental Protection Agency, 179 Epstein, L., 144 equilibrium, 72, 120, 143 equity, xvii, 141, 142 ethical finance, xxi EuroMillions, 92 European Cohesion Fund, 156 206 Q INDEX European Commission, 156 European Union, xxi–xxii evaluation: analysis for, 22; marginal utility and, 55; public good and, 178; of public policy, 154–57; social welfare and, 15 Evans, D J., 58 ex ante, 7–8, 9, 10, 18 expected utility, 5; discounted utility theory and, 19; ex ante and, 8; theory of, 7; view of, 11 ex post, 7, 12, 174 externalities: climate change and, 39; consumption and, 41; labor market and, 40; pollution as, 38; pollutionpay principle and, 43; public goods and, 38–43, 154; R&D and, 39; unemployment benefits and, 39; vaccinations and, 40 See also positive externalities extra-financial, 62, 64 Facebook, 126 fairness: allocation and, 35–36; competition and, 60; efficiency and, 35; income taxation and, 37 fat tails, 110, 112–15 Feltkamp, V., 105 finance, 94 financial behavior, xix financial crisis: episode of, 115; risk and, 126; secular stagnation and, 84 Q financial institutions, xiii financial markets, 78, 148; budget constraints for, xiii; financial variables and, xii; fossil fuels and, 67; frictionless economy and, xvii; long-termism and, 120–22; short-termism and, 72, 121, 143, 153 financial valuation, xxiii, xxiv financial variables, xi, xii First International Conference on the Protection of the North Sea, 172–73 fiscal system, Fischoff, B., 174 fixed-rate mortgages, xi Fleurbaey, M., 96 fossil fuels: divesting from, 67; reduction of, 126; uncertainty and, 119 France Stratégie, 156 frictionless economy: capital and, xiv; competition and, 34; financial markets and, xvii Friedman, Milton, 10 future generations: benefits and, 122; climate change and, 165; nonmonetary impact for, 117; uncertainty and, 89, 165; work for, 122 garment production, 52 Gaussian world: asset pricing theory and, 109–11; distributions in, 112; social desirability and, 95 207 Q INDEX GDP See gross domestic product Germany, 159 globalization, 49–50 Gordon, Robert, 84 government bills, 76 government bonds, 77 Grameen Bank, 80 Great Depression, 99 Great Leap Forward, xviii Green Book, 155 green investments, 74 green washing, xxi Groom, B., 58 gross domestic product (GDP): economic growth and, 96; expectations for, 158; world’s per capita and, 60 growth rate: consumption and, 84, 104, 147; distribution of, 113; maturity and, 108; probability of, 105, 106; prudence and, 106; risk profile and, 140 Guesnerie, R., 118, 168 Halevy, Y., 105 Hammitt, J K., 46, 47 Harrod, Roy, 20 Harsanyi, John, 3, 145 health: improvement of, 99; mad cow disease and, 173; substitution and, 28; swine flu and, 175; uncertainty and, 172 hedonic valuation: aspects of, 44–47; private sector and, 70; technique of, 44, 70; wages and, 46 hindsight bias, Q Hoel, M., 168 Hotelling’s rule, 119 human capital, 40 human resources, 69 immigration, 50 impartiality, 2–5 Imperial Academy of Sciences, income: elasticity of, 158; inequality of, 52, 192n2; marginal utility and, 29, 30, 54; transfer of, 54; uncertainty and, 89 income distribution, 3, 36 income taxation: fairness and, 37; inequality reduction and, 57; Laffer curve and, 58 independence axiom: additivity and, 15; consumption and, 127; critiques of, 8–13; Dutch book and, 12; economic theory of, 5–8; example of, 6; intuitive appeal of, 10; risk and, 6; traders and, 13; utilitarianism and, 21; violations of, 9, 13 Industrial Revolution, 88, 102 inefficiency, 181 inequality: aversion index of, 56, 59; cost–benefit analysis and, 54; declining expectations and, 100; degrees of, 55; income and, 52, 192n2; income taxation and, 57; Pigou–Dalton transfer and, 53; risk fluctuation and, 144–47; uncertainty and, 22; 208 Q INDEX valuation of, 53–62; veil of ignorance and, 5; well-being and, 16 inequality aversion: assumption for, 153; constant of, 138; consumption growth and, 123; illustration of, 90; index of, 106; risk aversion and, 184 inflation, xi infrastructure, 59; climate change and, xxviii; Juncker Plan and, xix; long-termism and, 95; pollution and, 154; public goods and, 41; R&D and, xxiii; zero lower bound and, 116 insufficient reason principle, 104 insurance: aversion index and, 57; climate beta and, 163; risk-sharing and, 129–31; willingness for, interest, 96 interest rate: consumers and, 75; decentralized economy and, 71; equilibrium and, 72, 120; green investments and, 74; for short-term, 82 interest rates: equilibrium for, xv; price of time as, xvi; price signals and, xxvii; social benefit and, xv; unemployment and, xii See also market interest rate intergenerational altruism, 81 intergenerational inefficiency, 80–83 Q intergenerational inequality: economic growth and, 83–85; ingredients of, 85; intergenerational welfare and, 84; investing and, 92–93; prudence and, 93 intergenerational welfare, xxiii, 136, 187, 189; competitive equilibrium and, 81; intergenerational inequality and, 84; macroeconomics and, 19–20 inverse gamma distribution, 110 investing, 84, 92–93 investment funds, as socially responsible, 64 investments: carbon dioxide emissions and, 73; credit markets and, 78; decentralized economy and, 177; decentralized society and, xii; decision rules for, 151; elements of, 122; equations for, 93; long-termism and, 182; safe capital and, 74; vice stocks as, xxii; wages and, 25 See also green investments; risky investments investments funds, 64 investors: CAPM and, xix; financial behavior of, xix; interests of, 1; public servants and, xxvi; risks and, 140 See also socially responsible investors Jefferson, Thomas, Juncker Plan, xix 209 Q INDEX Kahneman, Daniel, Kaldor–Hicks compensation criterion: allocation and, 48; cost–benefit analysis and, 50; globalization and, 49–50; immigration and, 50; pollution and, 48; terrorism and, 49 Kant, Immanuel, Kessler, L., 164 Keynes, John Maynard, 89 King, M., 77, 87 Koopmans, Tjalling, 18, 20 Krüger, P., 160 labor, 31 labor market, 1, 40 Laffer curve, 37, 58 Laffont, Jean-Jacques, 133, 162 Landier, A., 160 learning, 170–71 leisure, 28, 29 Let’s Make a Deal, 191n1 life expectancy, 61 Locke, John, long-termism: climate change and, 161; collective, xviii; financial markets and, 120–22; infrastructure and, 95; investment and, 182; puzzle of, 95, 100; risk premium and, 150; risky projects and, xxix lottery: Allais paradox and, 11; choices of, 91; decision criterion for, 22; EuroMillions and, 92; ex ante and, 10; Q expectations of, 9–10; probability and, 12–13; representation of, 92 Low, D., 77, 87 low-carbon companies, 68 Lucas, R., 154 Maastricht Treaty, 173 macroeconomics: crisis of, 112; finance and, 94; intergenerational welfare and, 19–20; investments and, xvi; risk premium and, 140, 148; volatility of, 101 mad cow disease, 173 Maddison, D J., 58 Malthus’s law, 88 marginal productivity, 39, 159 marginal utility: consumption and, 30; decreasing of, 29–31; evaluation and, 55; income and, 29, 30, 54; poor people and, 90; prudence and, 90; statistical life and, 111 marginal value, 32–33 marginal willingness, 31 market capitalization, 67 market economy, xxvi market interest rate, xiv, 100 market participants, 38 market power, 34 market prices, xviii, 31–34 markets, xvi Martin, I., 113, 148 maturity, 107; discount rate and, 114; growth rate and, 108; risk-adjusted discount rate 210 Q INDEX and, 153; risk premium and, 149 mean-preserving reduction, 127 Merton, Robert, 162, 188 microcredit, xii, 80 migrants, 50 Mnuchin, Steven, 83 monetary value, 33 “Monty Hall Problem,” 191n1 moral principle: collective decision-making and, 185; social desirability and, 177; uncertainty and, 4; veil of ignorance and, 3–4 Morgenstern, Oskar, 5, mutualization mechanisms, 131, 134, 138 oil reserves, 67 OPEC See Organization of the Petroleum Exporting Countries Organisation for Economic Co-operation and Development (OECD), 97, 181 Organization of the Petroleum Exporting Countries (OPEC), 34 ownership, 88 Pareto efficient, 35, 37 paternalism, 27, 61 Peabody Energy, 67 pension scheme, Pigou–Dalton transfer, 53, 57 pollution: as externalities, 38; illness and, 44; infrastructure and, 154; Kaldor–Hicks compensation criterion and, 48; marginal damage of, 43 pollution-pay principle, 42, 43 populism, 179, 180 portfolio: COP 21 and, 68; diversified, xvii, 141; divesting and, 68; socially responsible investor choices for, 66; social value–maximizing, xxvii positive externalities, 43 poverty, xii precautionary principle: irreversible actions and, 169–76; public sector and, 175; stands of, 172–73 natural asset, 168, 182 natural capital, 167–69 negative discount rates, 96 negative net present value, 75 net value, 65, 68 von Neumann, John, 5, NIMBY See not in my back yard Nordhaus, W D., 72, 73, 164, 166 normative capital, 150–54 not in my back yard (NIMBY), 49, 70 Occupy Wall Street, xiii, 179 OECD See Organisation for Economic Co-operation and Development Office of Management and Budget, 155 Q 211 Q INDEX price signals: interest rates and, xxvii; investments, 183; market economy and, xxvi; market prices and, xviii; public good and, xx; trade gains and, 60 Pricing the Planet’s Future (Gollier), xxx, 102 prioritarianism, 16–17 private capital, 155, 156 private equity, 143 private sector, xxvi, 70, 178 probability, 108; distribution of, 10–11; growth and, 149; of growth rate, 105, 106; lottery and, 12–13 production: cost–benefit analysis and, 33; decline of, 86; entrepreneurs and, 52; marginal value and, 32–33; technocrats and, 33 productivity, 88 profit-maximizing, 32 project-specific, 157, 177 prudence: behavior of, 89, 91; discount rate and, 106; finance theory and, 124; future of, 93–94; growth rate and, 106; intergenerational inequality and, 93; marginal utility and, 90 public economics, xx public goods, xx, 178; examples of, 42; externalities and, 38–43, 154; infrastructure and, 41 public investments, xviii Q public policy, xxv, 154–57 public sector, 175, 181 Rahwan, I., 4, 21 Ramsey, Frank P., 20 Ramsey Rule, 85–86, 87, 94, 103, 188 Rana Plaza, 23–25, 37, 47 Rawls, John, 17 R&D See research and development renewable energy, 171 research and development (R&D), xiii; climate change and, 73; externalities and, 39; infrastructure and, xxiii resources, 26, 32 retirement, xi Rietz, T A., 110, 147 Rio Declaration on Environment and Development, 172 risk: cost–benefit analysis and, 116; ex ante and, 9; financial crisis and, 126; independence axiom and, 6; inequality fluctuation and, 144–47; investors and, 140; mutualization mechanisms and, 134; price of, 182; social desirability and, 143, 184; sovereign bonds and, 141 risk-adjusted discount rate, 189; carbon dioxide emissions and, 161; maturity and, 153; risk-free rate and, 139; stocks and, 157 212 Q INDEX risk aversion, 56; aspects of, 127–29; collective risk and, 135, 147–50; cost–benefit analysis and, 125; degrees of, 146; economist and, 125; human beings and, 176; inequality aversion and, 184; mean-preserving reduction and, 127; Pigou–Dalton transfer and, 57 risk-free benefits, 163 risk-free discount rate, 107; economic growth and, 123, 147; private capital and, 156; term structure of, 108, 152; uncertainty and, 135 risk-free framework, 23 risk-free rate, 139 risk premium, 130; ArrowPratt approximation and, 128; long-termism and, 150; macroeconomics and, 140, 148; maturity and, 149; non-zero beta for, 152; risk profile and, 139; term structure and, 149 risk profile: equity premium and, xvii; growth rate and, 140; project-specific and, 157; reduction of, 130; risk premium and, 139 risk-sharing: Arrow-Lind theorem and, 133; insurance and, 129–31; solidarity and, 132–34 risky investments, xvi, 139 Robinson, L A., 46, 47 Q safe capital, 74, 75 safety standards, 24, 47 Samama, F., 66 Samuelson, P A., 18, 19, 115, 188 Savage, Leonard, 10, 104 savings, xv, 118 Schlesinger, H., 90 secular stagnation: financial crisis and, 84; proponents of, 26; technology and, 87 Selden, L., 144 Sezer, H., 58 Shariff, A., Shiller, R J., xxii, 134 short-termism, 122; finance theory and, xxviii; financial markets and, 72, 121, 143, 153 Sidgwick, Henry, 20 Smith, Adam, 26 social benefit, xv, 50–51, 65 social choice theory, xx social cost, 50–51, 62 social desirability, 1; actions for, 24; discount rate of, 95, 98; Gaussian world and, 95; investing and, 84; moral principle and, 177; resources and, 26; risks and, 143, 184; social welfare and, 2; term structure and, 102 socially responsible investor: disinvestment of, 65; economic impact of, 65; portfolio choices and, 66 socially responsible investors, 62–69 social value, xxiv, 38, 63 213 Q INDEX social value–maximizing portfolios, xxvii social welfare, 48; competitive equilibrium and, 37; evaluation of, 15; function of, 17; Pigou–Dalton transfer and, 53; social desirability and, 2; well-beings and, 27 socioeconomic benefits, 158, 159, 160, 170 socioeconomic beta, 157–60, 158 socioeconomic impact, 154 solidarity, 132–34 Solow, Robert, 21 solvency ratio, 79 sovereign bonds, xi, 82, 141 sovereign debt, 82 state-specific gains, 13 state-specific losses, 13 static framework, 23 statistical life: altruism and, 62; cost–benefit analysis and, 46; marginal utility and, 111; savings and, 118; valuation and, 61, 117, 158; value and, 51 Stern, N., 166 Sterner, T., 168 stocks, xix, 157 substitutability, 27–29, 109 substitution, 28 Summers, Larry, 51, 52, 84 supply and demand, 72 technocrats, 33 technology: advancement of, 125–26; climate change and, 169; marginal productivity Q and, 159; secular stagnation and, 87 terrorism, 49 Thesmar, D., 160 Tirole, J., xiii, 43, 133 Toulouse School of Economics, trade gains, 60 Treasury bonds, 82, 155 Trump, Donald, xix, 179 Tversky, Amos, uncertainty, xxix; Brownian and, 149; catastrophic events and, 113; climate change and, 171; cost–benefit analysis and, 176; deepness of, 103–9; economic growth with, 103–4; environment and, 118–19; fossil fuels and, 119; future generations and, 89, 165; health and, 172; income and, 89; independence axiom and, 6; inequality and, 22; learning and, 169, 170–71; moral principle and, 4; prudence and, 86–93; risk-free discount rate and, 135; zero lower bound and, 115 unemployment, xii, 39 United Nations Climate Change Conference (COP 21), 68 unweighted, 35 utilitarianism, 20; cost–benefit analysis and, 15–16; independence axiom and, 21; intergenerational welfare and, 136; veil of ignorance 214 Q INDEX and, 14; welfare function of, 14–16 valuation: competition and, 34–37; cost–benefit analysis and, 170; financial valuation, xxiii, xxiv; of inequality, 53–62; long-term risk and, xxix; natural capital and, 167–69; problems of, 31; risk profile and, 130; statistical life and, 61, 117, 158; veil of ignorance and, 19 See also hedonic valuation value: efficiency and, 42; of judgment, 3, 14; marginal, 32–33; measurement of, 44; monetary, 33; negative net present value, 75; net, 65, 68; social, xxiv, 38, 63; social value–maximizing portfolios, xxvii; statistical life and, 51; substitutability and, 27–29; theory of, 25 veil of ignorance, 184; allocations and, 16; aversion index and, 56; driverless cars and, 4; ex ante and, 18; impartiality and, 2–5; inequality and, 5; moral principle and, 3–4; utilitarianism and, 14; valuation and, 19 Q Ventura, J., 192n2 vice stocks, xxii volatility: of consumption, 101; economic growth and, 108; throughout history, 101–2 wages: competitive allocation and, 63; hedonic valuation and, 46; human resources, 69; investments and, 25; labor and, 31; marginal productivity and, 39 See also efficient wages Walmart, 24 Wealth of Nations, The (Smith), 26 Weitzman, M L., 108, 147, 161, 164; inverse gamma distribution and, 110 welfare economics, xxv welfare function, 14–16 well-being: environment and, 119; inequality and, 16; social welfare and, 27 window dressing, xxi World Bank, 51 Yaron, A., 99, 146 zero lower bound, 115, 116 Zin, S., 144 Zuber, S., 96 215 Q ... participants and the intensity of our efforts in favor of the future The interest rate fixes the tradeoff between the present and the future in everyone’s valuation process These driving forces for the. .. Développement Durable, the French Ministry of Ecology, and various foreign public institutions in the United States (the Environmental Protection Agency), the Netherlands, the United Kingdom, and Norway.. .ETHICAL ASSET VALUATION AND THE GOOD SOCIETY KENNETH J ARROW LECTURE SERIES KENNETH J ARROW LECTURE SERIES Kenneth J Arrow’s work has so deeply shaped the course of economics for the past