Intergenerational equity and the discount rate for cost-benefit analysis

Jean-François Mertens and Anna Rubinchik ()

No 2008047, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

Abstract: For two independent principles of intergenerational equity, the implied discount rate equals the growth rate of real per-capital income, say 2%, thus falling right into the range suggested by the U.S. Office of Management and Budget. To prove this, we develop a simple tool to evaluate small policy changes affecting several generations, by reducing the dynamic problem to a static one. A necessary condition is time-invariance, which is statisfied by any common solution concept in an overlapping generations model with exogenous growth. This tool is applied to derive the discount rate for cost-benefit analysis under two different utilitarian welfare functions : classical and relative. It is only with relative utilitarianism that the discount rate is well-defined for a heterogeneous society, is corroborated by an independent principle equation values of human lives, and equals the growth rate of real per-capital income.

Keywords: Social welfare function; social welfare functional; overlapping generations; exogenous growth; policy reform; intergenerational equity; intergenerational fairness; cost-benefit analysis; discount rate; social discount rate; utilitarianism; relative utilitarianism; welfarism (search for similar items in EconPapers)
JEL-codes: D31 D61 D63 E60 H43 (search for similar items in EconPapers)
Pages: 34
Date: 2008-12-01
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Intergenerational equity and the discount rate for cost-benefit analysis (2008)
Working Paper: Intergenerational equity and the discount rate for cost-benefit analysis (2008)
Working Paper: Intergenerational equity and the discount rate for cost-benefit analysis (2006)
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