Very Long-Run Discount Rates

We provide the first direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We find that very longrun discount rates are low, much lower than implied by most economic theory. We estimate these discount rates by exploiting a unique feature of residential housing markets in England, Wales and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, tradable ownership contracts with maturities between 50 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices represents the present value of perpetual rental income starting at leasehold expiry. We estimate the price discounts for varying leasehold maturities compared to freeholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high present values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued up to 15% less than otherwise identical freeholds. This suggests that both long-term risk-free discount rates and longterm risk premia are low. Together with the relatively high average return to housing, this also implies a downward sloping term structure of discount rates. Our results provide a new testing ground for asset-pricing theories, and have direct implications for climate-change policy, long-run fiscal policy and the conduct of cost-benefit analyses. JEL Codes: G11, G12, R30.