## Abstract

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 language | English |
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Pages (from-to) | 61-93 |

Number of pages | 33 |

Journal | Macroeconomic Dynamics |

Volume | 16 |

Issue number | 1 |

DOIs | |

State | Published - Feb 2012 |

## Keywords

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

## ASJC Scopus subject areas

- Economics and Econometrics