Intergenerational Equity and the Discount Rate for Cost-Benefit Analysis

CORE Discussion Paper No. 2006/91

25 Pages Posted: 6 Dec 2006  

Jean-Francois Mertens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Anna Rubinchik-Pessach

University of Colorado at Boulder - Department of Economics

Date Written: October 2006

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

Suggested Citation

Mertens, Jean-Francois and Rubinchik-Pessach, Anna, Intergenerational Equity and the Discount Rate for Cost-Benefit Analysis (October 2006). Available at SSRN: https://ssrn.com/abstract=949714 or http://dx.doi.org/10.2139/ssrn.949714

Jean-Francois Mertens (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium
32-10-474309 (Phone)
32-10-474301 (Fax)

Anna Rubinchik-Pessach

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States

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