Judicial Review of Discount Rates Used in Regulatory Cost-Benefit Analysis
Author(s)Morrison, Edward R.
Finance--Law and legislation
United States. Office of Management and Budget
Unfunded Mandates Reform Act of 1995 (United States)
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AbstractThe discount rate is a critical element of cost-benefit analysis. The value of cost-benefit analysis in improving regulatory decisions depends, in large part, on the reasonableness of the discount rate. Small variations in the discount rate can significantly bias the analysis. Despite the importance of the discount rate, courts have failed to develop a standard of review for agency discount rate choices. this is particularly troubling in light of evidence that agency practice exhibits wide-ranging, and generally unexplained, variation in discount rates. Not only do different agencies employ different rates, but the same agency will sometimes apply different rates to different regulations without explanation. This comment seeks to strengthen cost-benefit analysis by providing a framework for judicial review of agency discount rates. As a threshold matter, courts should find, as a matter of law, that an agency acts unreasonably if it fails to discount future costs and benefits, even if they accrue to future generations. Additionally, courts should take a "hard look" at agency discount rates and ask three basic questions: Is there a record for the agency's choice? Did the agency explain its choice between the alternative approaches to discounting, the SRTP and OCC? Did the agency consider the relevant factors in applying the chosen method? While these questions are standard fare in hard look review, they would represent a significant advance in judicial review of discount rates. More importantly, hard look review would provide strong incentives for agencies to adopt morally and economically sensible discount rates.