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INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS

  • Jean-François Mertens (a1) and Anna Rubinchik (a2)
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.

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Corresponding author
Address correspondence to: Anna Rubinchik, Department of Economics, University of Haifa, Mount Carmel, Haifa, 31905, Israel; e-mail: annarubinchik@gmail.com.
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This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

C. d'Aspremont (2007) Formal welfarism and intergenerational equity. In J. Roemer and K. Suzumura (eds.), Intergenerational Equity and Sustainability, Conference Proceedings of the IEA Roundtable Meeting on Intergenerational Equity, pp. 113130. Houndsmills, Basingstoke, UK: Palgrave Macmillan.

R. A. Gordon (1994) The Integrals of Lebesgue, Denjoy, Perron, and Henstock. Providence, RI: American Mathematical Society.

J. Kelley and I. Namioka (1963) Linear Topological Spaces. The University Series in Higher Mathematics. Princeton, NJ: Van Nostrand.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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