The Cost of Time: Haphazard Discounting and the Undervaluation of Regulatory Benefits

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, toward the undervaluation of risks to human lives. Insofar as cost-benefit analyses inform regulation, this suggests that the current system systematically under regulates against risks to health and safety. INTRODUCTION I. TIME, MONEY, AND RISK: AN ORIENTATION A. Risk and Money B. Time and Money C. Risk and Time II. MONETIZATION AND TIME-INDETERMINACY: PROBLEMS WITH PRACTICE A. Regulatory Cost-Benefit Analysis in Practice B. One Agency's Practice: EPA 1. Cost-Benefit Analysis at EPA 2. A Review of the Studies C. Policy Implications of Time-Indeterminacy III. TOWARDS A (PARTIAL) SOLUTION A. Improving Time-Determinacy B. Choosing When to Value Preferences IV. OBJECTIONS V. IMPLICATIONS OF TIME-INDETERMINACY IN OTHER CONTEXTS CONCLUSION INTRODUCTION To perform cost-benefit analyses, regulators often trade off immediate costs with benefits that will not accrue until some future time. How this trade-off is performed has important implications, particularly where--as with climate change, nuclear power, and the preservation of endangered species--most of the benefits of a regulatory action will be enjoyed by the future. How do regulators value risks to the future? At first glance, much the way they value immediate risks: they rely on studies that measure people's willingness to pay for a risk reduction and assume that those preferences are constant across contexts. If study participants are, on average, willing to pay $80 to ameliorate a risk of 1-in-100,000 of dying from cancer, regulators assume that preventing a single cancer death will justify an expenditure of $8 million. (1) But an expenditure of $8 million ... when? If the cancer death will not occur until twenty years from now, regulators assume that it will be appropriate to spend $8 million to prevent the death in twenty years. To determine how much to spend today to reduce the future (or "latent") risk, regulators "discount" the value of the risk reduction to modern-day dollars. They do this on the assumption that money has a time-value: a dollar today is worth less than a dollar twenty years from now, because money can be invested and made to grow. The effect of discounting is marked: at a 7% discount rate--a rate currently recommended by the Office of Management and Budget (2)--regulators would be willing to spend only $2 million today to prevent the future cancer death. This approach is highly controversial. (3) For the purposes of this Article, however, I take current practice on its own terms (4) and make a basic internal point. The point is this: study participants may discount too. This point will turn out to be very inconvenient for regulators. To see why, consider the example above. The initial study found that, on average, people were willing to spend $80 to ameliorate a cancer mortality risk of 1-in-100,000. Regulators used this figure to calculate both the amount they would spend now to prevent a single cancer death today ($8 million) and the amount they would spend now to prevent a single cancer death in twenty years ($2 million). To avert the risk of one hundred cancer deaths in twenty years, then, regulators would be willing to spend $200 million today. But if participants in the study gave their initial valuations on the assumption that the cancer death would come (if it did come) not today, but at some time in the future--then these numbers are completely wrong. …