DP16114 The Cross-Sectional Implications of the Social Discount Rate

Author(s): Maya Eden
Publication Date: May 2021
Keyword(s): age-based inequality, balanced growth path, Overlapping Generations, Utilitarianism
JEL(s): D6, E61
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16114

This paper establishes a relationship between the social discount rate and the marginal social welfare weights of people from different age groups. Under standard assumptions, I show that the social discount rate is equal to the market interest rate if and only if the equilibrium distribution of consumption across age groups is optimal. Along the balanced growth path, a social discount rate that is 4.5 percentage points lower than the market interest rate implies that it is socially desirable to reduce the consumption of a 70 year-old by 1 dollar in order to increase the consumption of a 20 year-old by 10 cents.