Post details: Changing How We Discount to Make Public Policy More Responsive To Citizens’ Time Preferences


Changing How We Discount to Make Public Policy More Responsive To Citizens’ Time Preferences

Laws and regulations have both benefits and costs, comparisons of which provide useful information. When such benefits and costs occur over time it is normal practice to discount them, with costs in the distant future considered less important than those occurring in the present, and distant benefits less valuable than present benefits. Conventionally, this discounting is done at a constant rate each period—so-called exponential discounting— with both cost and benefit streams being treated as if they were financial assets. However, humans are not exponential discounters. Rather, people tend to discount more than exponentially in the short run but less than exponentially in the long run. Such ‘hyperbolic’ discounting is empirically ubiquitous but neglected administratively. The recent ‘data quality act’ requires that information utilized by Federal agencies “adhere to a basic standard of quality, including objectivity, utility and integrity.” Here we argue that exponential discounting of many benefit streams—particularly non-pecuniary ones—fails the ‘data quality’ test and should be abandoned in favor of empirically-observed hyperbolic discounting.

by Robert L. Axtell, Gregory J. McRae.
AEI-Brookings Joint Center
Regulatory Analysis 06-01. Mar 2006.

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Environmental Valuation & Cost Benefit News covers legal, academic, and regulatory developments pertaining to the valuation of environmental amenities and disamenities, such as clean air, trees, parks, congestion, and noise. We apprise the reader about ways in which costs and benefits are measured, and the results of empirical studies. We hope that this information will allow public and private organizations to comprehend the risks and benefits of various actions, help disputants to resolve conflicts equitably and efficiently, and improve the quality of public policies. We will only discuss issues related to the empirical quantification of private and social costs and benefits and damages, and summarize information from daily newspapers, academic journals, legal publications, court decisions, professional newsletters commissioned studies, and on-line services. This newsletter is dedicated to the principal that all policies place values upon life, liberty, and the pursuit of happiness. We believe that more information, explicit specification of assumptions, and rigorous analysis can help our society to better meet these ends. This site will increasingly serve, in conjunction with others, as a valuation database. We will include a wide range of studies, including non-environmental reports, because omission of a factor effectively values it at zero, and biases decisions.


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