Macroeconomic Dynamics

Articles

INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS

Jean-François Mertensa1 and Anna Rubinchika2 c1

a1 CORE, Université Catholique de Louvain

a2 University of Haifa

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 Generations;
  • Policy Reform;
  • Intergenerational Equity;
  • Cost–Benefit Analysis;
  • Discount Rate;
  • Utilitarianism

Correspondence:

c1 Address correspondence to: Anna Rubinchik, Department of Economics, University of Haifa, Mount Carmel, Haifa, 31905, Israel; e-mail: annarubinchik@gmail.com.

Footnotes

We would like to thank the Center for Rationality in Jerusalem for its hospitality, and for their comments K. Arrow, Cl. d'Aspremont, Ch. de Bartolomé, G. Ponthière, R. M. Samaniego, and participants in PET'05, the “Intergenerational Equity in Climate Negotiations, Overlapping Generations Models and Social Welfare” conference at CORE, the International Game Theory Festival 2006 in Stony Brook, the ES Summer 2006 Meetings, the SAET Conferences in Vigo and Rhodos, the NBFR General Equilibrium Conference in Lawrence, KS, the European General Equilibrium Conference at Warwick, and the Conference in honor of E. Kalai in Jerusalem, as well as seminar participants at Boulder, Brussels, Cornell, Haifa, HUJI, LSE, Northwestern, Roma, Salerno, Stony Brook, TAU, UPenn, Warwick, Yale, and the “Séminaire de Jeux” in Paris. This paper presents research results of the Belgian Program on Interuniversity Poles of Attraction initiated by the Belgian State, Prime Minister's Office, Science Policy Programming. The scientific responsibility is assumed by the authors.

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