Intergenerational equity and the discount rate for cost-benefit analysis
(2008) , 34 pages
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Details
- Authors
- 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.
- Affiliations
University of Colorado at Boulder, USA Department of Economics
Citations
Mertens, J.-F., & Rubichink, A. (2008). Intergenerational equity and the discount rate for cost-benefit analysis (ECON Discussion Papers 2008-47). https://hdl.handle.net/2078.5/249395