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Discounting and welfare evaluation of policies
Author(s) -
Mertens JeanFrançois,
Rubinchik Anna
Publication year - 2017
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12266
Subject(s) - economics , discounting , welfare , consumption (sociology) , per capita , overlapping generations model , microeconomics , social welfare function , baseline (sea) , derivative (finance) , premise , population , value (mathematics) , mathematical economics , golden rule , econometrics , mathematics , financial economics , statistics , finance , biology , social science , linguistics , philosophy , demography , theology , sociology , fishery , market economy
We start with the premise that if policy discounting is to have any welfare relevance, one has to accept it being a derivative of a social welfare function (SWF). We show that if that derivative is to have a net present value (NPV) form, then the baseline allocation must be stationary. In addition, we show that at a stationary baseline in an overlapping generations growth economy, the intergenerationally fair discount rate equals the growth rate of per‐capita consumption, which is, roughly, 2% for the United States. This differs from the interest rate, even in the golden rule equilibrium, unless population growth is null. The last result is based on the main theorem in Mertens and Rubinchik (2012) and is demonstrated for a policy space that might naturally arise in applications.