Procedural Intergenerational Equity and the Social Discount Factor: A Bargaining Approach

This paper develops a procedural foundation for the social discount factor. Building on Binmore (2005), we define a procedurally intergenerationally equitable (PIE) path as the outcome of intergenerational bargaining. We then identify the discount factor under which a Ramsey model replicates this path and interpret it as an intergenerationally justifiable (IJ) discount factor. Using tractable models, we show that the IJ discount factor is closely linked to the economic environment. In a benchmark case, the corresponding discount rate coincides with the output elasticity of capital. We further examine a non- overlapping generations model with intergenerational altruism and an overlapping- generations model with individual time preferences, and show how these factors affect the IJ discount factor. These results establish a procedural foundation for the social discount factor and reinterpret discounted utilitarianism within a social contract framework.