Advertisement

Discount Rates and Infrastructure Safety: Implications of the New Economic Learning

  • Daniel A. FarberEmail author
Part of the Risk, Governance and Society book series (RISKGOSO, volume 19)

Abstract

Discounting is a tool used by economists to make tradeoffs over time. Discounting is relevant to disaster risks because they are generally low-probability and hence are not likely to occur immediately. The combination of low probability and the on-going nature of the risks make discounting especially salient for large-scale disasters. Because infrastructure can last for many decades in the future, the choice of discount rates can significantly affect assessments of the value of increased safety measures. An emerging consensus among economists calls for applying discount rates that are lower for risks farther in the future as compared with harms in the immediate future. The rationale is that long-term investments provide a hedge against uncertainty regarding future economic growth. Declining rates are also justified when portions of the population have low prospects for income growth compared with other societal groups. Inequality, particularly the future economic prospects of poorer individuals, matters in terms of discounting. Fixed discounting rates such as those now used by the U.S. government may undervalue disaster risks by using too high a discount rate. The implication is that society has been underinvesting in infrastructure resiliency.

Keywords

Discount Rate Disaster Risk Income Growth Safety Precaution Lower Discount Rate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

  1. Acemoglu D (2009) Introduction to modern economic growth. Princeton University Press, PrincetonzbMATHGoogle Scholar
  2. American Society of Civil Engineers (ASCE) (2014) Maximizing the value of investments using lifecycle analysis. Available at http://www.asce.org/uploadedFiles/Issues_and_Advocacy/Our_Initiatives/Infrastructure/Content_Pieces/asce-eno-life-cycle-report.pdf
  3. Arrow KJ et al (2012) How should benefits and costs be discounted in an intergenerational context? The views of an expert panel. Working Paper No. 12–53. Resources for the Future, Washington, DCGoogle Scholar
  4. Carey S (2014) Climate change, intergenerational equity and the social discount rate. Politics Philos Econ 13:320–342CrossRefGoogle Scholar
  5. Cooke RM (2012) Model uncertainty in economic impacts of climate change: Bernoulli Versus Lotka Volterra dynamics. Integr Env Assess Manage 9:2–6CrossRefGoogle Scholar
  6. Farber DA (2015) Gambling over growth: economic uncertainty, discounting, and regulatory policy. J Leg Stud (in press)Google Scholar
  7. Farber DA, Chen J, Verchick RRM, Sun LG (2010) Disaster law and policy. Aspen Press, New YorkCrossRefGoogle Scholar
  8. Giglio S, Maggiori M, Stroebel J (2013) Very long-run discount rates. Available at http://ssrn.com/abstract=2346049
  9. Gollier C (2013) Pricing the planet’s future: the economics of discounting in an uncertain world. Princeton University Press, PrincetonGoogle Scholar
  10. Guo J, Hepburn CJ, Tol RSJ, Anthoff D (2006) Discounting and the social cost of carbon: a closer look at uncertainty. Env Sci Policy 9:205–216CrossRefGoogle Scholar
  11. Interagency Working Group on Social Cost of Carbon (2013) Technical support document: technical update of the social cost of carbon for regulatory impact analysis under executive order 12866. Available at http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf
  12. Kane M (2014) Disagreement and design: searching for consensus in the climate policy and intergenerational discounting debate. William Mary Env Law Policy Rev 38:425–477Google Scholar
  13. Kevin W (2013) Jet grouting facilitates seattle seawall replacement, civil engineering. http://www.asce.org/magazine/20131217-jet-grouting-facilitates-seattle-seawall-replacement/
  14. Lagos M (2014) Aging Hetch Hetchy tunnel faces ‘catastrophic collapse’ if not fixed, regulators warn. Greenwire. Available at http://www.eenews.net/greenwire/2014/08/13/stories/1060004434
  15. Lane N (2008) Aging infrastructure: dam safety. GPO, Washington, DC (Congressional Research Service No RL33108)Google Scholar
  16. Li R (2010) New York’s aging buildings. NY Observer. Available at http://observer.com/2010/02/new-yorks-aging-buildings/
  17. Lilly G, Watts J, Smiley B (2013) Aging levees: an infrastructure challenge. Mil Eng 105(686):65–66. Available at http://themilitaryengineer.com/index.php/component/k2/item/271-aging-levees-an-infrastructure-challenge
  18. Massachusetts Department of Conservation and Recreation (Massachusetts DCR) (2009) Massachusetts coastal infrastructure inventory and assessment project coastal hazards commission infrastructure plan working group summary report. Available at http://www.mass.gov/eea/docs/czm/stormsmart/seawalls/public-inventory-report-2009.pdf
  19. McDonald C (2014) A bridge too far: repairing America’s aging infrastructure. Risk Manage. Available at http://www.rmmagazine.com/2014/02/01/a-bridge-too-far-repairing-americas-aging-infrastructure/
  20. Office of Management and Budget (OMB) (1972) Circular A-94. GPO, Washington, DCGoogle Scholar
  21. Office of Management and Budget (OMB) (1992) Circular A-94. GPO, Washington, DCGoogle Scholar
  22. Office of Management and Budget (OMB) (2003) Circular A-4. GPO, Washington, DCGoogle Scholar
  23. Parfit D (1985) Reasons and Persons. Oxford University Press, New YorkGoogle Scholar
  24. Picketty T (2013) Capital in the twenty-first century. Harvard University Press, CambridgeGoogle Scholar
  25. Ravalion M (2014) Income inequality in the developing world. Science 344:851–855CrossRefADSGoogle Scholar
  26. Revesz RL, Sahabian MR (2011) Climate change and future generations. South Calif Law Rev 84:1097–1162Google Scholar
  27. Shi L, Chuliang L (2010) Re-estimating the income gap between urban and rural households in China. In: White MK (ed) One country, two societies: rural-urban inequality in contemporary China. Harvard University Press, CambridgeGoogle Scholar
  28. Stiglitz JE (2013) The price of inequality: how today’s divided society endangers our future. W.W. Norton & Co., New YorkGoogle Scholar
  29. Sunstein CR, Rowell A (2007) On discounting regulatory benefits: risk, money and intergenerational equity. Univ Chic Law Rev 74:171–208Google Scholar
  30. The Economist (2014a) The poor are benefiting relatively little from Indonesia’s growth. The Economist. Accessed 3 May 2014Google Scholar
  31. The Economists (2014b) Briefing – economic convergence – the headwinds return. The Economist. Accessed 13 Sept 2014Google Scholar
  32. Traeger CP (2013) Discounting under uncertainty: disentangling the Weitzman and the Gollier effect. http://ssrn.com/abstract=2270459
  33. Wald M (2008) Faulty design led to Minnesota bridge collapse, inquiry finds. New York Times. Available at http://www.nytimes.com/2008/01/15/washington/15bridge.html#articleBodyLink
  34. Watson JT, Gayer M, Connolly MA (2007) Epidemics after natural disasters. Emerg Infect Dis 13(1):1–5PubMedCentralCrossRefPubMedGoogle Scholar
  35. Weisbach D, Sunstein CR (2009) Climate change and discounting the future: a guide for the perplexed. Yale Law Policy Rev 27:433–457Google Scholar
  36. Weitzman ML (1998) Why the far-distant future should be discounted at its lowest possible rate. J Environ Econ Manag 36:201–208zbMATHCrossRefGoogle Scholar
  37. Weitzman ML (2001) Gamma discounting. Am Econ Rev 91:260–271CrossRefGoogle Scholar
  38. Weitzman ML (2012a) The Ramsey discounting formula for a hidden-state stochastic growth process. Working Paper No. 18157. National Bureau of Economic Research, CambridgeGoogle Scholar
  39. Weitzman ML (2012b) Rare disasters, tail-hedged investments, and risk-adjusted discount rates. Working Paper No. 18496. National Bureau of Economic Research, CambridgeGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2016

Authors and Affiliations

  1. 1.Sho Sato Professor of LawUniversity of CaliforniaBerkeleyUSA

Personalised recommendations