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Intergenerational equity and the discount rate for cost-benefit analysis

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  • Jean-François, MERTENS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Anna, RUBINCHIK

    (Department of Economics, University of Colorado at Boulder, USA)

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: 01 Dec 2008
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Handle: RePEc:ctl:louvec:2008047

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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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Cited by:
  1. MERTENS, Jean-François & RUBINCHIK, Anna, 2006. "Intergenerational equity and the discount rate for cost-benefit analysis," CORE Discussion Papers 2006091, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Jean-Francois Mertens, 2010. "Welfare evaluation of policies in an overlapping generations growth model," 2010 Meeting Papers 1239, Society for Economic Dynamics.
  3. Mertens, Jean-François & Rubinchik, Anna, 2012. "Intergenerational Equity And The Discount Rate For Policy Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 16(01), pages 61-93, February.

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