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    Mertens, Jean-François and Rubinchik, Anna 2013. Equilibria in an overlapping generations model with transfer policies and exogenous growth. Economic Theory, Vol. 54, Issue. 3, p. 537.


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INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS

  • Jean-François Mertens (a1) and Anna Rubinchik (a2)
  • DOI: http://dx.doi.org/10.1017/S1365100510000386
  • Published online: 01 June 2011
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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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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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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