Time in Cost-Benefit Analysis

Research output: Contribution to journalArticlepeer-review

Abstract

Agencies are accustomed to considering questions of discounting — the process that makes monetary amounts comparable through time. But valuing the future is a distinctive enterprise for reasons that go beyond discounting. This Article explores two basic features of time that create challenges for intertemporal decision making: (1) time’s physical asymmetry, which makes relationships between the present and the future necessarily nonreciprocal, and (2) the subjective experience of time as continuously flowing, which creates definitional challenges in categorizing segments of time as “the future.” Although these features of time may affect any decision procedure, they have particular and concrete implications for the quantitative form of cost-benefit analysis on which American regulatory agencies routinely rely. First, because temporal asymmetry makes present/future relationships nonreciprocal, and because cost-benefit analysis lacks any intrinsic tool for managing distribution, there is a heightened need for supplemental distributional tools when cost-benefit analysis is performed intertemporally. Second, cost-benefit analysis relies upon quantification of the monetized value of future regulatory impacts — a process that depends on identifying the time at which those impacts accrue. Yet time flow creates systematic line-drawing challenges for decision makers who must distinguish between present and future events. To manage these, regulators should at least extend their analyses to the temporal break-even point, or the point in time where aggregate benefits of the rule equal aggregate costs. When decision makers compare future costs and benefits to current impacts, or even to foreign or other impacts, they should be wary of making cross comparisons that do not account for the distinctive qualities of future valuation.
Original languageEnglish (US)
Pages (from-to)1215-1240
Number of pages26
JournalUC Irvine Law Review
Volume4
StatePublished - 2014

Keywords

  • Cost-benefit analysis
  • law and regulation
  • time
  • Valuation
  • discounting
  • time flow
  • time asymmetry
  • entropy
  • Quantification
  • regulatory benefits
  • intertemporal impacts
  • line-drawing
  • Coase
  • reciprocal risk

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