Cost-benefit rules in general equilibrium

Should long-term assets such as infrastructure, education, and the environment earn the same return as productive capital? If yes, we can say that investments in such assets pass the cost-benefit test. But time-inconsistent decision-makers prefer to violate the test: long-term assets provide commitment to current preferences, leading to investment biases. We formulate the cost-benefit requirement as a rule that must be followed, also in large projects that influence the economy as a whole. The institutionalized cost-benefit prudence eliminates the biases but, surprisingly, has no social value in general equilibrium. The behavioral rule implements Pareto efficiency if and only if preferences are time-consistent, a case where the rule is redundant. We perform full welfare analysis under the Pareto criterion and describe self-enforcing and welfare-enhancing cost-benefit rules that link total savings and long-term investments. A climate change illustration shows that quantitative magnitudes can be significant. (JEL classification: H43; H41; D61; D91; Q54; E21.