Rational Discounting for Regulatory Analysis

W. Kip Viscusi

NBER Working Paper No. 12294
Issued in June 2006
NBER Program(s):Health Care, Law and Economics, Public Economics, Environment and Energy Economics

This article examines the economic basis for what is termed “rational discounting,” 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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Document Object Identifier (DOI): 10.3386/w12294

Published: Viscusi, W. Kip. “Rational Discounting for Regulatory Analysis." University of Chicago Law Review 74, 1 (Winter 2007): 209-246.

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