Cost-Benefit Analysis of Regulation

The Biden Administration's recommendation to lower the real discount rate used in the cost and benefit analysis of federal regulations to 2 percent (from the current levels of 3 or 7 percent) will substantially improve regulatory analysis.

Responses weighted by each expert's confidence

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Strongly Agree
9
Bio/Vote History
The safe discount rate should be based on inflation-indexed government bond yields and updated as these change. While rates have recently risen, it remains true that 2% is a better benchmark than 3% - and the new guidance also improves the handling of risk when that is required.
Cochrane
John Cochrane
Hoover Institution Stanford
Strongly Disagree
8
Bio/Vote History
Discount rate attracts attention: promises 50 years ahead justify big costs. The calculation of benefits is worse. "Dignity" and "indigenous culture" (p. 44). Income redistribution (p. 65.) Good: p. 27 no price controls, etc. 91 pages, paperwork mountain and lawsuit bonanza.
-see background information here
Cornelli
Francesca Cornelli
Northwestern Kellogg Did Not Answer Bio/Vote History
Diamond
Douglas Diamond
Chicago Booth
Uncertain
3
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Uncertain
9
Bio/Vote History
Depends on the riskiness of the future costs and benefits. A 5% discount rate could be too low or too high, depending on the regulation. One rate for everything is wrong.
Eberly
Janice Eberly
Northwestern Kellogg
Uncertain
6
Bio/Vote History
A lower discount rate supports proposals with longer run benefits, but no risk adjustment lowers costs of riskier proposals. The full doc discusses many issues, eg simplicity, cash flows. Discount rate has a big impact on PV, but “Substantial” is a high bar.
-see background information here
Fama
Eugene Fama
Chicago Booth
Uncertain
5
Bio/Vote History
Depends on the riskiness of the costs and benefits.
Gabaix
Xavier Gabaix
Harvard Did Not Answer Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Uncertain
4
Bio/Vote History
Graham
John Graham
Duke Fuqua Did Not Answer Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
No Opinion
Bio/Vote History
Not my area of expertise.
Hirshleifer
David Hirshleifer
USC Did Not Answer Bio/Vote History
Hong
Harrison Hong
Columbia Did Not Answer Bio/Vote History
Jiang
Wei Jiang
Emory Goizueta
Strongly Disagree
7
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Disagree
6
Bio/Vote History
A 2% real rate is essentially a T-Bond rate today. That seems very low for very uncertain and risky estimates of costs and benefits.
Kashyap
Anil Kashyap
Chicago Booth
Uncertain
3
Bio/Vote History
Koijen
Ralph Koijen
Chicago Booth Did Not Answer Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
Uncertain
6
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Strongly Agree
6
Bio/Vote History
The objective is to choose a rate that reflects the real interest rate. While 3% was a realistic estimate of this rate back in 2003 (when it was set), much evidence suggests it has fallen.
Ludvigson
Sydney Ludvigson
NYU
Agree
7
Bio/Vote History
Maggiori
Matteo Maggiori
Stanford GSB
Uncertain
7
Bio/Vote History
The previously higher rather were rather arbitrary. A lower rate might be appropriate, but what matters is the risk adjustment that depends on the risk and horizon of the project (e..g risk premia might be declining over the longer maturities)
-see background information here
-see background information here
Matvos
Gregor Matvos
Northwestern Kellogg
Uncertain
7
Bio/Vote History
The main effect of lowering the discount rate is to promote regulations that place more weight on the younger and unborn generations and less weight on the elderly.
Moskowitz
Tobias Moskowitz
Yale School of Management
Disagree
5
Bio/Vote History
I don’t see how a level shift in the discount rate can improve the quality or precision of analysis.
Nagel
Stefan Nagel
Chicago Booth
Agree
4
Bio/Vote History
2 percent is close to long-term historical average real interest rates and as such a reasonable rate for discounting certainty equivalents (which is what Circular No. A-4 suggests to do).
Parker
Jonathan Parker
MIT Sloan
Agree
4
Bio/Vote History
If this were to be effective, Circular A-4 would not be a confusing mess. Further, the number is backwards looking, the rate of return on Treasury debt reflects the ability of the US government to raise funds from taxpayers in bad times, and risk gets far too little attention.
-see background information here
Parlour
Christine Parlour
Berkeley Haas Did Not Answer Bio/Vote History
Philippon
Thomas Philippon
NYU Stern
Agree
8
Bio/Vote History
Puri
Manju Puri
Duke Fuqua Did Not Answer Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
Uncertain
4
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg Did Not Answer Bio/Vote History
Seru
Amit Seru
Stanford GSB
Disagree
5
Bio/Vote History
Stambaugh
Robert Stambaugh
UPenn Wharton
Disagree
7
Bio/Vote History
Hard to believe that tinkering with the discount rate is first-order compared to other dimensions of policy evaluation.
Starks
Laura Starks
UT Austin McCombs
Uncertain
3
Bio/Vote History
It will change the analysis, but will it actually substantially improve it? Not all questions can be addressed through solely a social approach or a market approach to determining the discount rate. Moreover, this presumes we should have the same discount rate for all regulation.
Stein
Jeremy Stein
Harvard
Uncertain
2
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern Did Not Answer Bio/Vote History
Sufi
Amir Sufi
Chicago Booth Did Not Answer Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Agree
5
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Agree
6
Bio/Vote History
A lower discount rate will focus society on longer-term costs and benefits of regulation, undoing some of the short-termism bias in private markets. One example where this has shown to matter is in climate abatement investments.
-see background information here
Whited
Toni Whited
UMich Ross School
Strongly Disagree
7
Bio/Vote History