The Cost of Time: Haphazard Discounting and the Undervaluation of Regulatory Benefits
38 Pages Posted: 4 Feb 2011 Last revised: 18 Oct 2012
Date Written: January 1, 2010
When performing cost-benefit analyses, regulators typically use willingness-to-pay studies to determine how much to spend to avert risks. Because money has a time-value, when a risk is valued is inextricable from how much it is valued. Unfortunately, the studies on which regulators rely are insensitive to this fact: they elicit people’s willingness to pay for risk reductions without identifying the time at which the risk reduction will occur. Relying on these time-indeterminate studies has led to a systematic skew in regulatory cost-benefit analysis, towards the undervaluation of risk. Insofar as cost-benefit analyses inform regulation, this suggests that the current system systematically under-regulates against risks to health and safety.
Keywords: Discounting, Cost-Benefit Analysis, Risk Regulation, VSL, Valuation of Lives, Intertemporal, Willingness-to-Pay
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