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Intergenerational equity and the discount rate for cost-benefit analysis

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Author Info
MERTENS, Jean-Franois
RUBINCHIK, Anna

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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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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: 01 Oct 2006
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Handle: RePEc:cor:louvco:2006091

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

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Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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