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INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS

Published online by Cambridge University Press:  01 June 2011

Jean-François Mertens  and
Anna Rubinchik
Jean-François Mertens
Affiliation:
CORE, Université Catholique de Louvain
Anna Rubinchik*
Affiliation:
University of Haifa
*
Address correspondence to: Anna Rubinchik, Department of Economics, University of Haifa, Mount Carmel, Haifa, 31905, Israel; e-mail: [email protected].
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Abstract

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. 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 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, and assuming time-invariance of the set of alternatives (policies), that the discount rate is well defined for a heterogeneous society at a balanced growth equilibrium, is corroborated by an independent principle equating values of human lives, and equals the growth rate of real per-capita income.

Keywords

Overlapping GenerationsPolicy ReformIntergenerational EquityCost–Benefit AnalysisDiscount RateUtilitarianism
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 1 , February 2012 , pp. 61 - 93
Copyright
Copyright © Cambridge University Press 2011

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