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Intergenerational equity and the discount rate for cost-benefit analysis

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Author Info
Jean-Franois, MERTENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
Anna, RUBINCHIK

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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

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2008047.

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Length: 34
Date of creation: 02 Dec 2008
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Handle: RePEc:ctl:louvec:2008047

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Related research
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;

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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