Département des Sciences Économiques de l'Université catholique de Louvain Intergenerational equity and the discount rate for cost-benefit analysis

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 that the discount rate is well-defined for a heterogeneous society, is corroborated by an independent principle equating values of human lives, and equals the growth rate of real per-capita income.