INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS

Jean-François Mertens and Anna Rubinchik ()

No WP2011/4, Working Papers from University of Haifa, Department of Economics

Abstract: For two independent principles of intergenerational equity, the implied discount rate equals the growth rate of real per capita 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 satisfied 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, and assuming time-invariance of the set of alternatives (policies), that the discount rate is well defined for a heterogeneous society at a balanced growth equilibrium, is corroborated by an independent principle equating values of human lives, and equals the growth rate of real per-capita income.

Keywords: Overlapping Generations; Policy Reform; Intergenerational Equity; Cost-Benefit Analysis; Discount Rate; Utilitarianism (search for similar items in EconPapers)
JEL-codes: D31 D61 D63 E60 H43 (search for similar items in EconPapers)
Pages: 33
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (2)

Published in Macroeconomic Dynamics

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Related works:
Journal Article: INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS (2012)
Working Paper: Intergenerational equity and the discount rate for policy analysis (2012)
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