01 Jan 2013

The role of discount rate in cost-benefit analysis between theory and practice

A comparative survey

Felice Simonelli


CEPS Researcher Felice Simonelli has published an article in the European Journal of Risk Regulation, 1, Lexxio, 2013, pp. pp. 59-71

This study focuses on the role of the discount rate in cost-benefit analysis (CBA) of regulation, providing a systematic investigation into regulatory practice vis-à-vis the existing economic theories. In the first part, a quick survey of the main economic literature on the social discount rate (SDR) is presented. In the second part, the current institutional practice is investigated, firstly comparing the recommendations on discounting issued by institutional actors in the US (Office of Management Budget, Environmental Protection Agency) and the EU (Commission), and secondly examining the SDRs adopted in two samples of CBAs selected among Regulatory Impact Analyses of US EPA and Impact Assessments of EU Directorate-General for the Environment. A gap exists between economic theory and institutional practice in the selection of the SDR. Regulatory decisions which are based on CBA reflect the most workable economic literature on discounting rather than the most theoretically consistent one, thus yielding less reliable and less robust results. Scholars who aim at improving the quality of rule-making and at fostering the application of CBA in regulatory decisions should improve the “operational validity” of their research, thus providing practitioners with methods that are both consistent and workable.

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