Intergenerational Equity and the Discount Rate for Cost-Benefit Analysis

Abstract

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.

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