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

Daniel A. Farber

The Journal of Legal Studies, 2015, vol. 44, issue S2, S509 - S528

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.

Date: 2015
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