Title Sustainability in a Risky World

Abstract:

How much consumption is sustainable, if \sustainability" requires that welfare should not be expected to decline over time? We impose a sustainability constraint on a standard consumption/portfolio choice problem. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustainable consumption-wealth ratio, which must lie between the riskless interest rate and the expected return on wealth (and if risky capital evolves according to a geometric Brownian motion, it lies exactly halfway between the two). Sustainability requires an upward drift in wealth and consumption to compensate future generations for the increased risk they face.

Bio:

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