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Intergenerational equity and the discount rate for cost-benefit analysis

  • Mertens, Jean-François

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • 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. Offce 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 that the discount rate is well-defined for a heterogeneous society, is corroborated by an independent principle equating values of hugrowth rate of real per-capita income.

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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 2008077.

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Date of creation: 01 Dec 2008
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Handle: RePEc:cor:louvco:2008077
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