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Intergenerational Equity And The Discount Rate For Policy Analysis

  • Mertens, Jean-François
  • Rubinchik, Anna

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.

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 16 (2012)
Issue (Month): 01 (February)
Pages: 61-93

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Handle: RePEc:cup:macdyn:v:16:y:2012:i:01:p:61-93_00
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  2. DHILLON, Amrita & MERTENS, Jean-François, . "Relative utilitarianism," CORE Discussion Papers RP -1398, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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