The rate of discount on public investments with future bias in an altruistic overlapping generations model

Toshiki Tamai

European Journal of Political Economy, 2023, vol. 79, issue C

Abstract: A typical approach to evaluating public investment projects requires an appropriate rate for discounting future benefits and costs. In many developed countries, the practical discount rate for benefit–cost analysis has been calculated using the Ramsey formula in an optimal growth model, stretched back to the pioneering work presented by Frank Ramsey in 1928. Intergenerational altruism that is widely observed in our society generates future bias. Therefore, elected governments under democracies are future-biased. In such cases, the Ramsey formula is no longer valid. This paper derives a modified Ramsey formula for an appropriate social discount rate to be applied instead of the conventional Ramsey formula. We also examine properties of equilibrium policy. The degree of future bias depends on the political power of young people relative to elderly people. Demographic effects such as population aging negatively affect public investment through decreasing future bias effects. This paper contributes to the optimal theory of public investment for calculating an appropriate social discount rate, both theoretically and practically.

Keywords: Future bias; Intergenerational altruism; Public investment; Social discount rate (search for similar items in EconPapers)
JEL-codes: D71 D72 H54 O41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:79:y:2023:i:c:s0176268023000605

DOI: 10.1016/j.ejpoleco.2023.102416

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