Intergenerational Equity and the Discount Rate for Cost-Benefit Analysis
Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)
University of Colorado at Boulder - Department of Economics
CORE Discussion Paper No. 2006/91
Current Office of Management and Budget (OMB) guidelines use the interest rate as a basis for the discount rate, and have nothing to say about an intergenerationally fair discount rate. We derive this discount rate by differentiating a social welfare function with respect to perturbations in individual endowments (which induce perturbations of equilibria) in an overlapping generations model with exogenous growth. A traditional utilitarian approach leads to too high values, and in a wide range, while Relative Utilitarianism implies it equals the growth rate of real per-capita consumption, independent of the interest rate. The differentiation is based on a novel method, applicable to arbitrary policy-variations, and that reveals a deep and very general property of exogenous growth models.
Number of Pages in PDF File: 25
Keywords: Social Welfare Function, Social Welfare Functional, Overlapping Generations, Exogenous Growth, Intergenerational Fairness, Cost-Benefit Analysis, Social Discount Rate, Utilitarianism, Relative Utilitarianism
JEL Classification: D61, D63, H43
Date posted: December 6, 2006
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