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Intergenerational equity and the discount rate for cost-benefit analysis

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  • MERTENS, Jean-François
  • RUBINCHIK, Anna

Abstract

Current Office of Management and Budget (OMB) guidelines use the interest rate as a basis for the discount rate, and have nothing to say about an intergenerationally fair discount rate. We derive this discount rate by differentiating a social welfare function with respect to perturbations in individual endowments (which induce perturbations of equilibria) in an overlapping generations model with exogenous growth. A traditional utilitarian approach leads to too high values, and in a wide range, while Relative Utilitarianism implies it equals the growth rate of real per-capita consumption, independent of the interest rate. The differentiation is based on a novel method, applicable to arbitrary policy variations, and that reveals a deep and very general property of exogenous growth models

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006091.

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Date of creation: 00 Oct 2006
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Handle: RePEc:cor:louvco:2006091

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Keywords: social welfare function; social welfare functional; overlapping generations; exogenous growth; intergenerational fairness; cost-benefit analysis; social discount rate; utilitarianism; relative utilitarianism;

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Cited by:
  1. Jean-François, MERTENS & Anna, RUBINCHIK, 2008. "Intergenerational equity and the discount rate for cost-benefit analysis," Discussion Papers (ECON - Département des Sciences Economiques) 2008047, Université catholique de Louvain, Département des Sciences Economiques.
  2. Mertens, Jean-Francois & Rubinchik, Anna, . "Intergenerational Equity And The Discount Rate For Policy Analysis," Working Papers WP2011/4, University of Haifa, Department of Economics, revised 01 Jun 2011.
  3. Jean-Francois Mertens, 2010. "Welfare evaluation of policies in an overlapping generations growth model," 2010 Meeting Papers 1239, Society for Economic Dynamics.

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