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Discounting and Welfare Evaluation of Policies

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Abstract

If policy discounting is to have any welfare relevance, it must be a derivative of a social welfare function. If that derivative is to have a net present value form, the baseline allocation must be stationary. Given a stationary baseline in an overlapping generations growth economy the inter-generationally fair discount rate under the relative utilitarian welfare function equals the growth rate of per-capita consumption, roughly, 2% for the U.S. This differs from the interest rate, even in the golden rule equilibrium unless population growth is null.

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  • Mertens, Jean-Francois & Rubinchik, Anna, "undated". "Discounting and Welfare Evaluation of Policies," Working Papers WP2015/7, University of Haifa, Department of Economics, revised 18 Nov 2015.
  • Handle: RePEc:haf:huedwp:wp201507
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    References listed on IDEAS

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    1. Harberger, Arnold C. & Jenkins, Glenn P., 2015. "Musings on the Social Discount Rate," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 6(01), pages 6-32, March.
    2. Amrita Dhillon & Jean-Francois Mertens, 1999. "Relative Utilitarianism," Econometrica, Econometric Society, vol. 67(3), pages 471-498, May.
    3. Murty, Sushama, 2009. "Topology of utility possibility frontiers of economies with Ramsey taxation," The Warwick Economics Research Paper Series (TWERPS) 912, University of Warwick, Department of Economics.
    4. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    5. 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.
    6. Mertens, Jean-Francois & Rubinchik, Anna, "undated". "Regularity And Stability Of Equilibria In An Overlapping Generations Growth Model," Working Papers WP2014/2, University of Haifa, Department of Economics.
    7. Mertens, Jean-François & Rubinchik, Anna, 2015. "Pareto Optimality Of The Golden Rule Equilibrium In An Overlapping Generations Model With Production And Transfers," Macroeconomic Dynamics, Cambridge University Press, vol. 19(08), pages 1780-1799, December.
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    Keywords

    policy evaluation; discounting; social welfare function; social discount rate; overlapping generations;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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