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Rational Discounting for Regulatory Analysis

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  • W. Kip Viscusi

Abstract

This 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.

Suggested Citation

  • W. Kip Viscusi, 2006. "Rational Discounting for Regulatory Analysis," NBER Working Papers 12294, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12294
    Note: HC LE PE EEE
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    Cited by:

    1. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
    2. Richard Zeckhauser & W. Viscusi, 2008. "Discounting dilemmas: Editors’ introduction," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 95-106, December.

    More about this item

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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