INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS

• Type: Article in International Scientific Journal
• Date: 2012

Authors

Mertens, JF (Author) Other; Rubinchik, A (Author) Other

Journal

Title: Macroeconomic Dynamics

Vol. 16

Pages: 61-93

ISSN: 1365-1005

Publisher: Cambridge University Press

Indexing

ISI Web of Knowledge - 3 Citations

Scopus - 3 Citations

Other information

Authenticus ID: P-017-3S5

DOI: 10.1017/s1365100510000386

Abstract (EN): 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. © 2010 Cambridge University Press.

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 33