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DISCOUNTING DOLLARS, DISCOUNTING LIVES

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Page 1Page 2Page 3Page 4Page 5Page 6Page 7Page 8Page 9Page 10Page 11Page 12Page 13Page 14Page 15Page 16Page 17Page 18Page 19Page 20Page 21Page 22Page 23Page 24Page 25Page 26Page 27Page 28Page 29Page 30Page 31Page 32Page 33Page 34Page 35Page 36Page 37Page 38ISSN 1045-6333 HARVARD JOHN M. OLIN CENTER FOR LAW, ECONOMICS, AND BUSINESS DISCOUNTING DOLLARS, DISCOUNTING LIVES: INTERGENERATIONAL DISTRIBUTIVE JUSTICE AND EFFICIENCY Louis Kaplow Discussion Paper No. 550 06/2006 Harvard Law School Cambridge, MA 02138 This paper can be downloaded without charge from: The Harvard John M. Olin Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center/ The Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/abstract_id=######*Harvard University and National Bureau of Economic Research. I am grateful to conference participants forcomments, Ryan Copus, Jonathan Lin, Robert Lutzker, and Elisa Poncz for research assistance, and to the John M. OlinCenter for Law, Economics, and Business at Harvard University for financial support. The central idea in this article firstemerged as part of a 1995 draft (that received only limited circulation) for a book project that has become Kaplow(forthcoming); that idea and much of the elaboration draws on the current book manuscript as well as on other articles onthe relationship between distribution and efficiency in various settings.JEL Classes D31, D61, D63, D81, D99,H23, H43, K32, Q28, Q38, Q58 Discounting Dollars, Discounting Lives: Intergenerational Distributive Justice and EfficiencyLouis Kaplow*AbstractThe view that intergenerational distributive justice and efficiency should be treatedseparately is familiar, yet controversial. This article elaborates the often-implicit justificationsfor separate treatment and provides a more express statement of how and when such treatment isappropriate. Substantial attention is devoted to an approach that holds constant the intra- andintergenerational distribution of well-being, which proves to be a valuable analytical device evenfor intergenerational policies that are not distribution neutral. Also explored are possibleinterrelationships between intergenerational distributive justice and efficiency, the choice ofinterest rate for discounting dollars, and how the present approach relates to those that wouldemploy direct social weights to dollars at different points in time.Forthcoming, University of Chicago Law Review1The question of population size is distinct, but note that it may arise even in the simple world in which there isonly one resource to allocate over time. Additionally, population size issues might be classified as intragenerational innature. In any event, population size will not be considered further here.2Some favor discounting of utility or lives to avoid imposing what are perceived as excessive savings obligationson earlier generations. One strand of such work builds upon Ramsey (1928), who presents a model in which earlygenerations’ savings rates should be very high. See, for example, Arrow et al. (1996a), at 137, and Arrow (1999). Additionally, in some models a zero discount rate over an infinite horizon leads to conundrums, such as no consumptionof exhaustible resources ever being permitted (when such resources are the only source of consumption). See, forexample, Heal (1993), at 868-878. In any event, a range of scholars (including Ramsey) have opposed any discounting ofutility, the most commonly cited reason being that it violates equal treatment (although some would nevertheless imposelimits on the sacrifice required of early generations if a pure no-discounting approach required great sacrifice). See, forexample, Broome (1992), at 52-112; Cowen (1992); Cowen and Parfit (1992); Parfit (1984), at 480-86; Revesz (1999);and Sidgwick (1907). Interestingly, Rawls (1971), at 284-98, though arguing from an original position, does not reachthis conclusion, in part because he stipulates that only a single generation is taken to be behind the veil of ignorance (eventhough that generation is ignorant of which generation it is). This approach is criticized, for example, by Barry (1977;1989, at 189-203), and a revised view is presented in Rawls (1993), at 274. For a libertarian approach that would imposemore limited obligations on present generations, see Gauthier (1986). For collections of views, see Laslett and Fishkin(1992) and Portney and Weyant (1999).- 1 - Discounting Dollars, Discounting Lives: Intergenerational Distributive Justice and EfficiencyLouis Kaplow© Louis Kaplow. All rights reserved.1. IntroductionThe thesis of this article is that questions of intergenerational distributive justice and ofintergenerational efficiency are substantially distinct in principle. A pure issue ofintergenerational distributive justice would be presented in a simple, hypothetical world, inwhich the only decision with intergenerational consequences concerned the rate of use of a singleresource: More for any one generation would entail less for another. The argument here is that,however that sort of allocation should ideally be made or is in fact determined, all furtherconsideration of intergenerational dimensions of policies – whether involving the environment,infrastructure, research and development, education, or social security – dissolves almost entirelyinto matters of efficiency.1 This claim does not entail that the remaining efficiency questions arestraightforward or uncontroversial. It does imply that they are essentially the same questions thatarise when considering policies whose impact is confined to a single generation.Part of this claim may be restated using the rubric of discounting. Whether lives – or,more broadly, utility – in different generations should be discounted is one way to define somepositions in debates about intergenerational distributive justice.2 From the welfarist perspectivegenerally followed here – under which social welfare is taken to be solely a function ofindividuals’ well-being – a discount rate (including a zero rate) may be employed in thespecification of the social welfare function that aggregates the well-being of individuals in3Although much of the analysis will be explicitly welfarist, many of the ideas are applicable to a variety ofnonwelfarist theories for the reasons suggested in the conclusion. For contrasting views on welfarism, see, for


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