Intergenerational transfers and the social discount rate
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
This paper investigates the relationship between intergenerational asset transfers and the choice of the discount rate for use in cost-benefit analysis in a model of a competitive overlapping generations economy constrained by a socially managed exhaustible resource. Provided that there are no distortions in capital markets and that all agents hold perfect foresight, cost-benefit techniques will result in a Pareto efficient resource allocation if the discount rate is set equal to the market rate of interest. But since the path of the interest rate depends on the level of intergenerational transfers, cost-benefit techniques do not ensure a socially desirable distribution of welfare between generations; a social optimum will result only if intergenerational transfers are properly chosen and enforced. Decentralized private altruism may result in intergenerational transfers that both present and future individuals would agree are too small if members of the present generation attach positive weight to the general welfare of future generations, not simply their personal descendants. In a world where intergenerational transfers are non-optimal, second-best policy-making may imply a constrained optimum that is inefficient. Together, these findings suggest that cost-benefit analysis is at best a partial criterion to policy formulation that should be used only in conjunction with ethical principles that define the proper distribution of welfare between present and future generations.
- Abel, A. B. and B. D. Bernheim (1992), ‘Fiscal Policy with Impure Intergenerational Altruism’, Econometrica 59, 1687–1711.
- Arrow, K. J. and R. C. Lind (1970), ‘Uncertainty and the Evaluation of Public Investment Decisions’, American Economic Review 60, 364–378.
- Barro, R. J. (1974), ‘Are Government Bonds Net Wealth?’, Journal of Political Economy 82, 1095–1117.
- Batie, S. S. (1989), ‘Sustainable Development: Challenge to the Profession of Agricultural Economics’, American Journal of Agricultural Economics 71, 1083–1101.
- Blanchard, O. J. and S. Fischer (1989), Lectures on Macroeconomics, MIT Press, Cambridge, Massachusetts.
- Brown Weiss, E. (1984), ‘The Planetary Trust: Conservation and Intergenerational Equity’, Ecology Law Quarterly 11, 495–581.
- Daly, H. E. and J. B. Cobb, Jr. (1989), For the common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future, Beacon Press, Boston.
- Dasgupta, P. S. and G. M. Heal (1979), Economic Theory and Exhaustible Resources, Cambridge University Press, Cambridge.
- Fisher, A. C. (1981), Resource and environmental Economics, Cambridge University Press, Cambridge.
- Graham-Tomasi, T., C. F. Runge and W. F. Hyde (1986), ‘Foresight and Expectations in Models of Natural Resource Markets’, Land Economics 62, 234–249.
- Hanley, N. (1992), ‘Are There Environmental Limits to Cost-Benefit Analysis?’, Environmental and Resource Economics 2, 33–59.
- Harberger, A. C. (1978), ‘On the Use of Distributional Weights in Social Cost-Benefit Analysis’, Journal of Political Economy 86, S87-S120.
- Hotelling, H. (1931), ‘The Economics of Exhaustible Resources’, Journal of Political Economy 39, 137–175.
- Howarth, R. B. (1991a), ‘Intergenerational Competitive Equilibria under Technological Uncertainty and an Exhaustible Resource Constraint’, Journal of Environmental Economics and Management 21, 225–243.
- Howarth, R. B. (1991b), ‘Intertemporal Equilibria and Exhaustible Resources: An Overlapping Generations Approach’, Ecological Economics 4, 237–252.
- Howarth, R. B. (1992), ‘Intergenerational Justice and the Chain of Obligation’, Environmental Values 1, 133–140.
- Howarth, R. B. and R. B. Norgaard (1990), ‘Intergenerational Resource Rights, Efficiency, and Social Optimality’, Land Economics 66, 1–11.
- Howarth, R. B. and R. B. Norgaard (1992), ‘Environmental Valuation under Sustainable Development’, American Economic Review Papers and Proceedings 80, 473–477.
- Kimball, M. S. (1987), ‘Making Sense of Two-Sided Altruism’, Journal of Monetary Economics 20, 301–326.
- Lind, R. C. (1982), ‘A Primer on the Major Issues Relating to the Discount Rate for Evaluating National Energy Options’, in R. C. Lind, ed., Discounting for Time and Risk in Energy Policy, pp. 21–94, Resources for the Future, Washington, D.C.
- Lind, R. C. (1990), ‘Reassessing the Government's Rate of Discount Policy in Light of New Theory and Data in a World Economy with a High Degree of Capital Mobility’, Journal of Environmental Economics and Management 18, 8–28.
- Little, I. and J. Mirlees (1968), Manual of Industrial Project Analysis, Volume II, Organization for Economic Cooperation and Development, Paris.
- Marglin, S. A. (1963), ‘The Social Rate of Discount and the Optimal Rate of Investment’, Quarterly Journal of Economics 77, 95–111.
- Markandya, A. and D. W. Pearce (1988), Environmental Considerations and the Choice of the Discount Rate in Developing Countries, World Bank, Washington.
- Page, T. (1977), Conservation and Economic Efficiency: An Approach to Materials Policy, Johns Hopkins University Press, Baltimore.
- Partridge, E. (1981), Responsibilities to Future Generations, Prometheus, Buffalo.
- Pearce, D. W., A. Markandya and E. B. Barbier (1989), Blueprint for a Green Economy, Earthscan Publications, London.
- Pearce, D. W. and R. K. Turner (1990), Economics of Natural Resources and the Environment, Johns Hopkins University Press, Baltimore.
- Pezzey, J. (1989), Economic Analysis of Sustainable Growth and Sustainable Development, World Bank, Washington.
- Sen, A. K. (1982), ‘Approaches to the Choice of Discount Rates for Social Benefit-Cost Analysis’, in R. C. Lind, ed., Discounting for Time and Risk in Energy Policy, pp. 325–353, Resources for the Future, Washington, D.C.
- Stiglitz, J. E. (1982), ‘The Rate of Discount for Benefit-Cost Analysis and the Theory of the Second Best’, in R. C. Lind, ed., Discounting for Time and Risk in Energy Policy, pp. 151–204, Resources for the Future, Washington, D.C.
- Takayama, A. (1985), Mathematical Economics 2d edition, Cambridge University Press, New York.
- Tietenberg, T. (1984), Environmental and Natural Resource Economics, Scott Foresman, Glenview, Illinois.
- Wilson, R. (1982), ‘Risk Measurement of Public Projects’, in R. C. Lind, ed.., Discounting for Time and Risk in Energy Policy, pp. 205–249, Resources for the Future, Washington, D.C.
- World Commission on Environment and Development (1987), Our Common, Future, Oxford University Press, Oxford.
- Intergenerational transfers and the social discount rate
Environmental and Resource Economics
Volume 3, Issue 4 , pp 337-358
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links
- exhaustible resource allocation
- intergenerational equity
- intergenerational transfers
- overlapping generations models
- social discount rate
- Industry Sectors