The Case for Differential Discounting: How a Small Rate Change Could Help Agencies Save More Lives and Make More Sense

Abstract:     
Over the past thirty years, the dominant rationale for mandatory, formal cost-benefit analysis (CBA) of federal health, safety and environmental regulations has changed from “CBA operates as a necessary institutional roadblock against power-hungry regulators” to “CBA is a neutral tool that assists regulators in identifying welfare-maximizing regulatory options.” However, despite this change in intention and justification, the actual CBA methodologies the OMB directs the agencies to use haven’t changed much in three decades, and still reflect the strong anti-regulation sentiment of the Reagan administration. One methodological choice that continues to operate as a very powerful bias against protective regulatory standards is the OMB directive that executive agencies must discount the public health and environmental benefits of regulation at the same rate used for monetary costs.

The standard argument against using a lower discount rate for health, safety and environmental benefits is that this would cause agencies to defer cost-beneficial regulations ad infinitum; under differential discounting, it is argued, a beneficial regulation would always produce more net benefits if its implementation were delayed another year, and so no rational agency would ever implement anything. This article demonstrates that this “perpetual delay” argument relies on an invalid assumption; once this assumption is eliminated, any perpetual delay phenomenon disappears.

Next, several “opportunity cost” arguments for equal discounting are shown to conflate the choices theoretically available to society as a whole with the outcomes actually available to regulatory agency decision makers. While the opportunity costs of any alternative investments actually displaced by regulations may be relevant considerations for regulators, the arguments — premised in opportunity cost — that logic compels equal discounting of regulatory costs and benefits all fail.

Finally, the article summarizes and discusses the substantial evidence that the discount rate agencies apply to the non-fungible, often intangible public health and environmental benefits of regulation should be significantly lower than the rate used for monetary costs within the same
cost-benefit analysis.

Number of Pages in PDF File: 49

Keywords: Cost-Benefit Analysis, Discounting, Office of Information and Regulatory Affairs, OIRA, Executive Order 12866, Regulatory Review

JEL Classification: D61, K23, K32

Accepted Paper Series