Gambling Over Growth: Economic Uncertainty, Discounting, and Regulatory Policy
17 Pages Posted: 8 Sep 2013
Date Written: September 6, 2013
Uncertainty about a possible harm is obviously relevant in deciding how much to regulate. More surprisingly, however, risks that are completely unrelated to the subject of the regulation can also be important. In particular, uncertainties about the future trajectory and distribution of economic growth have a substantial impact on the discount rate, which in turn favors additional investment in preventing long-term harms. Although issues relating to discounting are notoriously difficult and controversial, an increasingly prevalent view among economists supports the use of declining interest rates because of uncertainties about future economic growth. A similar argument supports declining rates when the distribution of growth is unequal or the future distribution is uncertain.
This paper explains the foundations of these conclusions and their application to regulatory decisions involving climate change, carcinogens, and infrastructure safety. In general, current U.S. practices undervalue future regulatory benefits due to improper discounting. Regulations to protect environmental quality, public health, and safety may have additional value as hedges against uncertainties and disparities involving future economic growth.
Suggested Citation: Suggested Citation