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Intergenerational equity and the discount rate for cost-benefit analysis

Author

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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.

Suggested Citation

  • Jean-François, MERTENS & Anna, RUBINCHIK, 2008. "Intergenerational equity and the discount rate for cost-benefit analysis," Discussion Papers (ECON - Département des Sciences Economiques) 2008047, Université catholique de Louvain, Département des Sciences Economiques.
    • Handle: RePEc:ctl:louvec:2008047
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    Cited by:

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

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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