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Gambling over Growth: Economic Uncertainty, Discounting, and Regulatory Policy

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  • Daniel A. Farber

Abstract

Uncertainty about a possible harm is obviously relevant in deciding how much to regulate. More surprisingly, however, uncertainties about the future trajectory and distribution of economic growth also have a substantial impact on the discount rate, which in turn favors additional investment in preventing long-term harms. Economists increasingly support the use of declining interest rates for longer-term costs or benefits because of uncertainties about future economic growth. Declining rates are also appropriate when the distribution of growth is unequal or the future distribution is uncertain. This article explains the foundations of these conclusions and their application to regulatory decisions involving climate change, carcinogens, and infrastructure safety. In general, current US practices undervalue future regulatory benefits because of 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.

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  • Daniel A. Farber, 2015. "Gambling over Growth: Economic Uncertainty, Discounting, and Regulatory Policy," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 509-528.
    • Handle: RePEc:ucp:jlstud:doi:10.1086/676690
    DOI: 10.1086/676690
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    References listed on IDEAS

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    1. Christian Gollier & Phoebe Koundouri & Theologos Pantelidis, 2008. "Declining discount rates: Economic justifications and implications for long-run policy [‘Regime switches in interest rates’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(56), pages 758-795.
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    5. Marc Fleurbaey & Stéphane Zuber, 2012. "Climate policies deserve a negative discount rate," Working Papers halshs-00728193, HAL.
    6. Christian Traeger, 2014. "Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(3), pages 627-664, August.
    7. David C. Wyld, 2010. "ASecond Lifefor organizations?: managing in the new, virtual world," Management Research Review, Emerald Group Publishing Limited, vol. 33(6), pages 529-562, May.
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    Cited by:

    1. Serban Raicu & Mihaela Popa & Dorinela Costescu, 2022. "Uncertainties Influencing Transportation System Performances," Sustainability, MDPI, vol. 14(13), pages 1-15, June.

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