Working Paper: NBER ID: w12294
Authors: W. Kip Viscusi
Abstract: 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.
Keywords: discounting; regulatory analysis; intergenerational effects; value of statistical life
JEL Codes: Q50; D90; H10; L50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher discount rate (E43) | lower present value of future benefits (H43) |
| failure to discount (D15) | permanent loss of environmental amenities (Q26) |
| failure to discount (D15) | preference to defer policies (E60) |
| discounting practices (L42) | policy timing decisions (E60) |
| waiting for more effective future technologies (O39) | better outcomes than immediate policies (D78) |