The Rate of Discount on Public Investments with Future Bias in an Altruistic Overlapping Generations Model

A typical approach to evaluating public investment projects requires an appropriate rate for discounting future benefits and costs. In many developed countries, the practical discount rate for Benefit–Cost Analysis has been calculated using the Ramsey formula in an optimal growth model, stretched back to Ramsey (1928). Intergenerational altruism that is widely observed in our society generates future bias; therefore elected governments under democracies are future biased. Then, the Ramsey formula is no longer valid. This paper derives the modified Ramsey formula for an appropriate social discount rate, instead of the conventional Ramsey formula. We also examine the properties of equilibrium policy. The degree of future bias depends on the political power of the young relative to the elderly. Demographic effects such as population aging negatively affect public investment through decreasing future bias effects. This paper contributes to the optimal theory of public investment for calculating an appropriate social discount rate theoretically and practically