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Gambling over Growth: Economic Uncertainty, Discounting, and Regulatory Policy

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  • Daniel A. Farber

Abstract

Uncertainty about a possible harm is obviously relevant in deciding how much to regulate. More surprisingly, however, uncertainties about the future trajectory and distribution of economic growth also have a substantial impact on the discount rate, which in turn favors additional investment in preventing long-term harms. Economists increasingly support the use of declining interest rates for longer-term costs or benefits because of uncertainties about future economic growth. Declining rates are also appropriate when the distribution of growth is unequal or the future distribution is uncertain. This article explains the foundations of these conclusions and their application to regulatory decisions involving climate change, carcinogens, and infrastructure safety. In general, current US practices undervalue future regulatory benefits because of improper discounting. Regulations to protect environmental quality, public health, and safety may have additional value as hedges against uncertainties and disparities involving future economic growth.

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  • Daniel A. Farber, 2015. "Gambling over Growth: Economic Uncertainty, Discounting, and Regulatory Policy," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 509-528.
    • Handle: RePEc:ucp:jlstud:doi:10.1086/676690
    DOI: 10.1086/676690
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    References listed on IDEAS

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    1. Christian Gollier & Phoebe Koundouri & Theologos Pantelidis, 2008. "Declining discount rates: Economic justifications and implications for long-run policy [‘Regime switches in interest rates’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(56), pages 758-795.
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    6. Christian Gollier, 2012. "Pricing the Planet's Future: The Economics of Discounting in an Uncertain World," Economics Books, Princeton University Press, edition 1, volume 1, number 9894.
    7. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    8. Marc Fleurbaey & Stéphane Zuber, 2012. "Climate policies deserve a negative discount rate," Working Papers halshs-00728193, HAL.
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    Cited by:

    1. Serban Raicu & Mihaela Popa & Dorinela Costescu, 2022. "Uncertainties Influencing Transportation System Performances," Sustainability, MDPI, vol. 14(13), pages 1-15, June.

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