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Intergenerational equity and the discount rate for cost-benefit analysis

  • Jean-François, MERTENS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Anna, RUBINCHIK

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

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
Date of revision:
Handle: RePEc:ctl:louvec:2008047
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