Rational Discounting for Regulatory Analysis
AbstractThis article examines the economic basis for what is termed %u201Crational discounting,%u201D which entails full recognition of policy effects over time and exponential discounting at a riskless rate of return. Policies often cannot be ranked unambiguously in terms of their present or future orientation. Both failure to discount and preferential intergenerational discounting generate inconsistencies and economic anomalies. Office of Management and Budget discounting guidelines now stipulate more reasonable discount rates than earlier guidelines, but err in permitting open-ended preferential rates for intergenerational effects. The article presents a methodology for monetizing the value of statistical life for people of different ages and at different points in time. Review of regulatory analyses indicates increased consistency of discounting practices. However, examination of two policies with intergenerational effects, stratospheric ozone regulation and nuclear waste storage at Yucca Mountain, reveal failures to adopt a rational discounting approach. The influence of behavioral anomalies such as hyperbolic discounting may make full recognition of intertemporal effects in benefit-cost analysis more consequential than the use of preferential discount rates.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12294.
Date of creation: Jun 2006
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Publication status: published as Viscusi, W. Kip. “Rational Discounting for Regulatory Analysis." University of Chicago Law Review 74, 1 (Winter 2007): 209-246.
Note: HC LE PE EEE
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- Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
- D90 - Microeconomics - - Intertemporal Choice - - - General
- H10 - Public Economics - - Structure and Scope of Government - - - General
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-17 (All new papers)
- NEP-CDM-2006-06-17 (Collective Decision-Making)
- NEP-PBE-2006-06-17 (Public Economics)
- NEP-REG-2006-06-17 (Regulation)
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- Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
- Richard Zeckhauser & W. Viscusi, 2008. "Discounting dilemmas: Editors’ introduction," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 95-106, December.
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