Intergenerational equity and the discount rate for policy analysis

Jean François Mertens, Anna Rubinchik

Research output: Contribution to journalArticlepeer-review


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, and assuming time-invariance of the set of alternatives (policies), that the discount rate is well defined for a heterogeneous society at a balanced growth equilibrium, is corroborated by an independent principle equating values of human lives, and equals the growth rate of real per-capita income.

Original languageEnglish
Pages (from-to)61-93
Number of pages33
JournalMacroeconomic Dynamics
Issue number1
StatePublished - Feb 2012


  • Cost-Benefit Analysis
  • Discount Rate
  • Intergenerational Equity
  • Overlapping Generations
  • Policy Reform
  • Utilitarianism

ASJC Scopus subject areas

  • Economics and Econometrics


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