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The impact of adverse historical event on individual time preference

The impact of adverse historical event on individual time preference


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I am a Development Economist, I recently get interested in time preference reading several insightful economic papers (Godoy 1998, Godoy 2001, Holden et al 1998, Holden 2013, Galor and Ozak 2015).

I am currently looking for more bibliography on time preference and especially on the factors that can explain heterogeneity in time preference for individuals from a given population. If anyone of you know any research paper on the factors explaining within population variation in time preference I will be happy to read your comments.

What I plan to do is to assess whether, within a given population, individuals whose ancestors faced adverse historical event (such as forced migration (i.e. forced village relocation) during colonial times, around 70 years ago) exhibit today higher levels of time preference compared to their peers not affected by such event. The channel would be that such behavior, due to forced migration that uprooted former generations, transmitted through culture from one generation to the other. In an agrarian economy, these differences in time preference would translate today in different investment behavior (such as decision to fallow land).

Godoy 1998 "The role of tenure security and private time preference in Neotropical Deforestation" Land Economics, Vol 74, No.2 May 1998 pp 162-170
Godoy 2001 "Tenure security, private time preference, and use of resources among lowland Bolivian Amerindians" Ecological Economics 38 (2001) 105-118
Holden et al 1998 "Poverty, market imperfections and time preferences: of relevance for environmental policy?" Environment and Development Economics 3 (1998) 105-130
Galor and Ozak 2015 "The Agricultural Origins of Time Preference" Working paper


The Shadow of the Future: Discount Rates, Later Generations, and the Environment

[W]e find ourselves forced to hunt for a solution in the dark jungles of the second best[1].

If saving a life is worth spending $1 million today, how much should we spend to save a life in twenty years? The answer, according to the federal Office of Management and Budget (OMB), is $150,000[2]. OMB uses a ten percent annual "discount rate" to convert future regulatory costs and benefits into their "present value."[3] Because government regulation of carcinogens cannot be expected to affect the cancer rate for twenty or thirty years[4], OMB's choice of discount rates has dramatic implications for regulatory policy. Its choice of discount rates has even greater impact on long-term global environmental issues such as ozone depletion and the greenhouse effect[5]. For instance, if the greenhouse effect will cost society $100 billion twenty years from now, OMB's current discount rate would indicate that it is not worth spending $20 billion today to avert the harm.

Significant legal implications also accompany the discounting issue's policy ramifications. In Corrosion Proof Fittings v. EPA[6], the Fifth Circuit invalidated the Environmental Protection Agency's (EPA) carefully considered regulations of asbestos products. Among other objections to the regulations[7], the court found EPA's method of comparing the costs and benefits of an asbestos ban to be unacceptable. The court held that EPA must discount future benefits and that EPA's discounting method gave too much weight to future deaths[8]. Although our discussion concerns more than just toxics regulation, Corrosion Proof Fittings illustrates the significance of the issue not only for policy analysts but also for attorneys.

After several years of review, OMB recently proposed a substantial revision of its twenty-year-old discount policy[9]. Among other changes, OMB proposes increased guidance for government agencies in the use of discount rates in cost-benefit analysis and a reduction of the discount rate from ten percent to seven percent. Coming two decades after the last revision, OMB's current proposal seems an appropriate point to take stock of federal discount rate policy, its underlying assumptions, its impact on environmental policy choices, and its lessons for the coming decades.

This Article attempts to untangle the complex and often obscure debate about the choice of discount rates. It will emphasize the issue of discounting lives, but that issue cannot be readily separated from the broader problem of discounting other regulatory costs and benefits[10]. Thus, our discussion of discounting is also directly relevant to long-term environmental issues such as biodiversity. In particular, most of the same issues arise when cost-benefit analysis seeks to incorporate the intrinsic value placed on the continued existence of an endangered species or other nonhuman lives such as whales or redwoods.

Part II briefly reviews the current role of economic efficiency and cost-benefit analysis in environmental regulation, with particular regard to the problem of assigning a monetary value to human lives. We then explain the basic concept of discounting and demonstrate the momentous impact that choice of a discount rate can have on environmental cost-benefit analyses. Part III explores the debate surrounding the selection of the proper discount rate. Part IV examines questions of fairness to future generations affected by discounting future environmental benefits. Finally, Part V considers how the discounting debate sheds light on the proper uses of cost-benefit analysis.

The discounting issue combines technical economics with philosophical conundrums. Although we will offer suggestions about the proper choice of discount rates, most of our views are necessarily tentative. Nevertheless, one point seems fairly clear: OMB has set its current discount rate too high. This has resulted in an unwarranted curtailment of important environmental regulations.

Before beginning our analysis, it may be helpful for us to explain our general perspective. Essentially, we have attempted to adopt the vantage point of a policymaker in a democratic society, and to ask how such a policymaker should think about long-term programs. Regardless of whether the policymaker uses a formal cost-benefit analysis, she will probably need to understand the trade-offs between environmental protection and economic welfare. Two kinds of trade-offs become especially important for long-term projects. First, money invested in environmental protection might otherwise have been invested in other productive assets. Thus, environmental protection may come at the cost of economic growth. Here, the trade-offs really depend upon whether environmental protection diverts funds from other investments (rather than from current consumption), not on when society receives the benefits. Second, long-term projects produce benefits in the future at the expense of consumption in the present, and the delay may affect how society evaluates the trade-off between current and future welfare. We favor an approach to discounting that treats these factors separately,[11] but even if the decisionmaker adopts a different methodology, we believe she will want to have information about both effects. We have organized our presentation accordingly.

From the vantage point of our (possibly imaginary) thoughtful policymaker, workability is more crucial than theoretical rigor. Economic theorists and professional philosophers rightly concentrate on conceptual nuances and complexities, but the policymaker needs more pragmatic solutions. Furthermore, in a democratic society, the policymaker may have some freedom of action, but also must give weight to the views of the public. For this reason, in evaluating various positions regarding discounting, we have felt free to appeal to what we believe to be generally shared value judgments.

One final introductory point, in the interests of candor. Our belief that the democratic policymaker must give weight to public opinion does not mean government by opinion poll. We believe that our society as a whole, and government in particular, focuses too much on the present and is investing too little for the future[12]. Thus, we think the policymaker should "lean against the wind" a bit, taking a longer view than the latest polls or market reports. Consequently, within the range of positions that seem reasonably supportable, we have leaned toward future-mindedness, which translates into a preference for lower discount rates.

II. A CRITICAL INTRODUCTION TO COST-BENEFIT ANALYSIS AND DISCOUNTING

A. The Role of Cost-Benefit Analysis in Environmental Regulation

Most federal environmental statutes that regulate health risks favor feasibility analysis over cost-benefit analysis[13]. For example, the Clean Air Act mandates the use of maximum achievable control technology to curb emission of hazardous air pollutants[14]. Although numerous provisions of environmental statutes require EPA to consider economic factors, none explicitly requires a formal cost-benefit analysis. Some commentators argue that economic efficiency should have little role in environmental regulation[15]. Nevertheless, in the past decade the federal government has applied cost-benefit analysis increasingly in policymaking, including environmental regulation. President Reagan's famous Executive Order 12,291, promulgated in 1981, requires agencies issuing "major rules" to conduct a cost-benefit analysis to ensure that the benefits of a proposed regulation outweigh its costs[16]. Executive Order 12,291 effectively provides a cost-benefit overlay for all major federal regulatory actions[17]. In Corrosion Proof Fittings, for instance, EPA and the Fifth Circuit independently concluded that the decisionmaking process should include a cost-benefit analysis although the statute does not explicitly require one[18].

More recently, President Bush imposed a ninety-day moratorium on new regulations. During the moratorium, agencies were instructed to existing regulations to ensure compliance with the following standards (among others):

(a) The expected benefits to society of any regulation should clearly outweigh the expected costs it imposes on society.

(b) Regulations should be fashioned to maximize net benefits to society[19].

As this executive order illustrates, economic analysis, including efficiency and cost-benefit criteria, is flourishing in federal policymaking. Cost-benefit analysis and its components, including discounting, appear likely to shape environmental policymaking for the foreseeable future.

Valuation is a key step in conducting a cost-benefit analysis. Cost-benefit analysis requires that future benefits be expressed in monetary terms. For goods freely traded on the market, such an assumption is often reasonable. However, for "non market goods" like human life (or the inherent value people place on the existence of other species), the assignment of a monetary value is much more controversial. Even assuming agreement on the propriety of "monetizing" human life, deriving an accurate value is a difficult task. Existing regulations establish values ranging from $70,000 to $132 million per life saved[20]. This tremendous range attests to the difficulty of assigning a specific monetary value to human lives saved. Similar problems hinder efforts to establish a value for the continued existence of an endangered species apart from the species' direct usefulness to humans[21].

When economists talk about placing a value on a human life, they are referring to a statistical life, not to the value of the life of any particular individual. Such valuation essentially attempts to measure what preventing the death of an unidentified person (a "statistical death") is worth to society[22]. Economists suggest several alternative methods for assigning a value to a life saved by regulation, including measures of discounted lifetime consumption, human capital (sometimes called the discounted lifetime production approach), net contribution to society, jury awards in compensation for death, and willingness to pay[23]. Each approach is open to criticism, but economists generally agree that willingness to pay is the best measure[24].

Economists generally use two methods to estimate society's willingness to pay to preserve a life. The first is to use wage differentials between risky and safe occupations to determine the increase in earnings that individuals demand for an incremental increase in risk. That increment can be extrapolated to determine the value workers implicitly place on their lives. A second method--which can also be modified to measure the value placed on endangered species or other aspects of nature--is simply to ask individuals what risk premium they require, using a "contingent valuation" survey[25].

Even assuming that we can estimate accurately what individuals are willing to pay to save a life, the use of such an estimate presents troubling difficulties. Most obviously, willingness to pay depends on ability to pay. Wealthy individuals and groups may be "willing" to pay substantially more for an increment of risk reduction than poor individuals[26]. Further, individuals may inaccurately estimate risk and incorrectly respond to these risks in terms of wage demands for a variety of reasons, including incomplete information, other market imperfections, and misperception of risk[27].

Another objection to willingness-to-pay as a measure is its dependence on the initial assignment of rights. Generally, people will require a larger payment to relinquish a right than they will pay to acquire that right[28]. In order to determine willingness to pay, the decisionmaker must first decide whether an individual already has a right to the good in question. In the asbestos situation, for example, the policymaker would need to determine in advance whether individuals have a right to a healthful, asbestos-free environment[29]. Similarly, if the government conducted cost-benefit analysis to decide whether to save whales, the result could turn on whether the initial entitlement is assigned to whalers or Greenpeace[30].

Apart from the difficulty of placing a dollar value on life, overall reductions in the levels of human mortality may not fully capture the benefits of toxics regulation. Society also may place importance on other characteristics of risks, such as potential clustering of victims[31]. Moreover, regulations may have important incidental benefits that regulators may have even more difficulty quantifying. Analysts tend to omit these "soft variables" from the analysis[32].

For example, in Corrosion Proof Fittings, EPA's calculation of the benefits of an asbestos ban focused on lives saved by the elimination of asbestos and essentially ignored other benefits[33]. Failure to include benefits like reduced treatment costs and diminished environmental degradation caused a significant underestimation of the benefits of asbestos regulation. While EPA mentioned potential illness-and-treatment costs avoided, it failed to include them in its cost-benefit calculation[34]. Similarly, though it acknowledged that an asbestos ban could produce significant ecological benefits, EPA declined to consider such advantages because it found them too difficult to quantify[35]. TSCA protects not only human health, but also the environment[36]. EPA failed to explain why it considered environmental benefits too hard to quantify, but was undaunted by the task of quantifying the benefits in terms of lives saved[37].

Even if saving lives is the primary regulatory goal, statistical deaths avoided may provide an inapt measure of the regulation's value. Placing a value on the small reduction in risk of asbestos-related death that would accrue to each individual provides one alternative to the statistical-deaths-avoided approach. Summation of all individual benefits would yield the total social benefit. Such a measure avoids some of the problems presented by placing a value on life (for example, the distortion involved in extrapolating from small risks valuations to an estimate of the value for certain death) and may more accurately reflect the actual impact of the decision[38]. On the other hand, reliable information on these valuations seems difficult to obtain. The degree to which individuals discount future health effects provides an important determinant of individual valuation of risks. This, however, simply returns us to our central concern, the problem of determining an appropriate discount rate.

B. An Introduction to Discounting

The basic principle underlying discounting is simple: A dollar today is worth more than a dollar at some time in the future. This is the same "time value" principle that underlies the concept of interest. Suppose lender L loans borrower B $100 in year one, to be repaid in year two. L will forego current use of the $100 only if B pays her a premium for that forgone use when B repays the loan in year two. That premium is interest. If B and L agree that B will pay $110 in year two for the use of L's $100 in year one, the simple interest rate is ten percent[39]. If we asked L how much $110 in year two is worth to her today, she would presumably answer "$100." L "discounts" the money she will receive in the future by ten percent. This reflects the time value of money principle: X dollars one year from now is worth less than X dollars today.

The term "present value" describes the current value to the recipient of a benefit that will be conferred in the future. In the above example, the present value to L of $110 in year 2 is $100. The ten percent rate L uses to discount the money she will receive in year two is called the "discount rate." Note that this analysis also applies to costs to be incurred in the future. Everything else being equal, L would be indifferent between paying a cost (for example, a tax) of $110 in year two or $100 today, because L discounts future costs at a simple rate of ten percent per year.

The arithmetic becomes more complicated when more than one period is involved. As money or monetary costs are conferred further in the future, compound interest decreases their present value geometrically. The formula for determining the present value of a sum to be conferred in some future year is:

where Bt represents the amount that the beneficiary will receive in future year t, r stands for the discount rate, and t represents the number of years from the present when the beneficiary receives the money[40]. By substituting the monetary value of the benefit for Bt, one can use the above formula to determine the present value of any future benefit that can be expressed in monetary terms. Analysts similarly can discount future costs expressed in monetary terms to present value[41].

The costs and benefits of a given government policy often extend over more than one year. A policy generally distributes those costs and benefits unequally over time, so simple comparison of gross costs and gross benefits would ignore the time value of money. Consequently, cost-benefit analysts generally discount all costs and benefits to present value before comparing them. The difference between the present value of all benefits and the present value of all costs of a project or regulation is often called its "Net Present Value" (NPV). A positive NPV (benefits exceed costs) suggests that the government should adopt a regulation and a negative NPV suggests that it should not.

Thus, to determine the NPV, the policymaker must derive a social discount rate that reflects the time value of the stream of costs and benefits for the entire population affected by the regulation[42]. Determination of the appropriate discount rate presents a tremendous practical problem that federal agencies have not resolved uniformly, despite prodding from OMB[43].

Though justification of the discount rate and estimates of its numerical value vary substantially, economists generally agree that cost-benefit analysis requires discounting future benefits and costs to present value. Given this consensus regarding the need for discounting, an understanding of the impact of the choice of discount rate on the results of cost-benefit analysis becomes important. As the Table on the following page illustrates, discounting can dramatically affect the value of a proposed regulation's costs or benefits,[44] depending on the size of the discount rate and the length of time before society realizes the costs or benefits. Because society often incurs the costs of environmental regulation long before the benefits,[45] compound discounting generally has a greater impact in the calculation of the present value of benefits than of costs.

Given these dramatic figures, it should be no surprise that methods of discounting are critical to cost-benefit analysis and often pivotal in regulatory decisions[47].

III. DETERMINING THE APPROPRIATE DISCOUNT RATE

Finding the correct discount rate requires a deeper analysis of why people prefer a given "quantity" of present benefit over the same "quantity" of future benefit. Economists emphasize two explanations: the opportunity cost of forgone benefits, and pure time preference (impatience)[48].

Economists base the concept of social opportunity cost on the productivity of capital. Generally, investment of resources today generates a larger quantity of resources available for future consumption. Thus, the future return from investment (which itself represents forgone present consumption) is essentially a future flow of consumption. The interest rate, and thus the discount rate, reflect the opportunity cost of relinquishing present consumption[49].

The pure time preference principle is grounded mostly in impatience people prefer receiving benefits immediately over receiving them some time in the future. Economists sometimes call the discount rate derived from this principle the Social Time Preference Rate[50]. Pure time preference also may evidence a belief that future societies are likely to be richer, making an extra dollar of benefit worth less in the future than it is to the current society. Economists often call this rationale for discounting the "diminishing marginal utility" argument. Most economists agree that the discount rate that the time preference explanation suggests--which we will call the social discount rate--is substantially lower than the rate that the opportunity cost indicates[51]. Current estimates, based on the long-term real rate of return on riskless investments (Treasury notes and bonds), are in the neighborhood of one percent[52].

In a world without taxes, the social discount rate should equal the opportunity cost. But the tax system drives a wedge between the two[53]. For example, if individuals use a two-percent discount rate for personal consumption, they will choose to save only if given a two-percent return. But to generate a two-percent return after taxes to consumers, firms must invest in projects offering a higher return. If business and personal taxes take a combined "bite" of fifty percent out of firm income by the time it reaches shareholders, the firm will need to earn a four-percent return in order to give shareholders their two-percent after-tax return. Thus, in this simple example, the social discount rate is two percent, while the implicit opportunity cost of capital is four percent. As we will see, the distinction between the social discount rate and the opportunity cost of capital has crucial importance for cost-benefit analysis[54].

A. Intragenerational Time Preferences and the Social Discount Rate

One rationale for discounting is a simple preference for a benefit today over the same benefit tomorrow. As an empirical observation of psychology, humans are often impatient[55]. However, the issue of whether impatience and preferences based on that emotion are a rational[56] or prudent basis for public policy decisions remains open for debate. Even economists generally agree that time preference provides a weaker justification for discounting than social opportunity cost. Preferences can change over time because of what one commentator describes as a "defect of the telescopic faculty."[57]. For example, a person might express a time preference for saving one life today over ten lives in twenty years, but after the twenty years have elapsed, that same person may favor saving the ten lives. If policymakers discount future benefits based on the aggregate (social) time preference at the time of the decision, they may make decisions that the society will later realize were biased imprudently in favor of small present benefits.

In some sense, saying that future consumption is less beneficial than present consumption is clearly wrong. We may currently place a lower value on the right to drink a milkshake a year from now than on drinking one today. But this does not mean that when we do drink the milkshake, it will taste any worse (or have any fewer calories). Moreover, leaving a milkshake in the freezer for a year will not result in 1.02 milkshakes at the end of the year milkshakes, like human lives, do not compound. Discounting future consumption on the basis of time preference simply reflects the fact that most people would rather drink a milkshake now than wait a year. Applying the same interest rate to harmful events like deaths implies a preference for postponing pain. Whether these preferences have any rational basis is unclear, even when ordinary consumer goods are involved, let alone human lives or endangered species[58].

Quite apart from concerns about the rationality of individual time preferences, deriving a discount factor from individual behavior is not easy. According to economic theory, rational individuals should use a single discount rate for both saving and borrowing over all time periods. The empirical evidence indicates a quite different result. Riskless investments provide a very low real rate of return, approximately one percent or so[59]. On the other hand, people are willing to borrow money at significantly higher rates, even while maintaining low-interest investments[60]. They also seem to discount future gains differently than future losses, contrary to conventional economic theory[61]. Sometimes, people even will pay money in order to save, as in the once-popular Christmas clubs. These clubs offered the opportunity to lock up funds with no interest (meaning a real loss of value, given inflation), so that individuals would have them available during the holiday season. A desire of people to precommit to various levels of savings seems responsible for least some of these disparities. This desire may make it rational to tie up some funds for a two-percent return while borrowing on a credit card at a much higher real rate[62]. As Professor Lind explains:

Turning specifically to discount rates for human lives, a recent survey conducted by economists at Resources For the Future asked a thousand Maryland households about their preferences regarding saving human life[64]. The survey results suggest that, on average, people would discount future lives saved within 25 years at an annual rate of 8.6%, but would use an annual rate of 3.4% if the time horizon is 100 years[65]. A Swedish study using a different methodology found much lower rates, in the neighborhood of .0001 percent[66]. Responses to such surveys vary remarkably. In one study, about ten percent of the respondents had negative discount rates,[67] while many others had (in effect) infinite discount rates: they refused to give any weight to deaths occurring many years in the future, on the ground that science would surely discover a method of eliminating any risk in the meantime[68]. Adding to the confusion, an econometric effort to determine how much people discount their own lives in the future derived a rate of about two percent, close to the return on riskless investment.[69]

Even putting aside the additional perplexities of intergenerational effects,[70] these studies provide few clear answers. Economic theory assumes a degree of consistency regarding intertemporal preferences that seems questionable in the real world. There are also genuine normative concerns about this kind of discounting. Nevertheless, we believe that, with respect to intragenerational effects, policymakers should use a small discount rate in the neighborhood of one or two percent[71]. Although we do not claim that this position is logically unassailable, it is supported by several pragmatic considerations.

Initially, we do not think that policymakers should set the social discount rate higher than the real rate of return on riskless investment, for several reasons. Setting the social discount rate higher than the riskless investment interest rate would imply that the population currently saves too much. (If people save at two percent interest, but discount their own future consumption at a higher rate, they are irrationally trading current consumption for a level of later consumption that they actually regard as less valuable.)[72] This implication about savings is contrary to a broad consensus among economists and the public that American savings rates are actually too low[73]. To counter this hypothetical excessive saving, the government should then run the deficit as high as possible, borrowing money at the riskless rate from foreign investors in order to finance a current spending spree. Although that fiscal policy bears an unfortunate resemblance to government actions during the 1980s, we doubt that the idea of drastically increasing the deficit would find much support[74]. This suggests that in setting the social discount rate the government should act as if the current savings rate were either optimal or too low, not as if it were too high.

Moreover, as we have seen, empirical studies show that people use a variety of discount rates in different situations. Among these rates, the return on riskless investments is arguably the most relevant. Unlike some of the empirical studies of how people would make hypothetical choices, investment rates reflect actual decisions, and therefore indicate preferences more accurately. As compared with many borrowing rates (such as those on consumer credit), investment rates are less likely to reflect impulsive decisions and are more likely to reflect thoughtful deliberation. They are also more likely to reflect long-term preferences, as opposed to short-term desires for liquidity or other effects, such as the practical unavailability of certain goods except on credit (e.g., equity ownership of housing)[75]. Finally, individuals seem to privilege their long-term investment strategies, even when this requires rather expensive efforts to protect against shorter-term impatience. This suggests that investment returns reflect their considered judgment about time preferences better than interest rates on consumer debt.

The preceding discussion suggests that policymakers should not set the social discount rate for intragenerational effects at a higher rate than the real rate of return on investments. Should they set it lower? Although the question probably has more theoretical than practical significance,[76] it is not easy to resolve. The idea of a zero rate has substantial appeal, since a death today and a death tomorrow are in some fundamental sense equal. Nevertheless, we tentatively reject use of a zero discount rate for two reasons. First, we are dealing here only with discounting within a particular generation, not with obligations to later generations[77]. This means that the same individuals are involved in both relevant time periods. The question is whether, in considering costs or benefits to a particular individual, the government should apply a lower discount rate than that individual herself applies in reasonably well-considered personal decisions. Such a policy would raise concerns about paternalism, which at least puts the burden of proof on the proponents of a zero rate.

Second, setting the discount rate at zero would leave it below the rate of return on riskless investments such as government bonds (which also supplies the discount rate for ordinary consumption)[78]. This disparity creates the possibility of paradoxical results. For example, precommitting to future regulations can become optimum for society even though the regulations are never worth their cost[79]. It seems perverse that society should precommit to adopting a regulation that society finds unwarranted today and will find equally unwarranted when it finally goes into effect.

Thus, we believe that policymakers should use the riskless investment rate as both a ceiling and a floor for the social discount rate. According to the most recent empirical evidence, this translates into a discount rate of roughly one percent[80]. Accordingly, in considering intragenerational effects, we should discount future lives, but only at a very low rate.

B. How Should Policymakers Assess Opportunity Costs?

In the previous section, we were primarily concerned with the intertemporal preferences of consumers as a reason for discounting. The fact that dollars invested to comply with regulation might otherwise have been invested provides another justification for discounting future regulatory benefits. Because the investment's benefits (saved lives) remain unrealized for several years, society "loses" the interest on the dollars that it would have obtained if society had employed those dollars elsewhere, earning interest or otherwise appreciating. Discounting accounts for the societal loss of welfare due to foregone investment opportunities[81].

It is important to realize that the opportunity cost rationale applies to the investment in regulatory compliance, not to the value of the regulatory benefits. A life saved today does not earn interest to become two lives twenty years from today. Conversely, if a regulation saves two lives twenty years from today, it makes little sense to say that the opportunity cost of saving those lives means those two future lives are only worth one life today[82]. Similarly, the question of whether full lung capacity and ability to breathe freely at age thirty is any less valuable than the same attributes at age twenty is still open[83].

If adopting a regulation decreases other investment, policymakers should take into account the loss of the possible return from alternative investments[84]. Traditionally, they have done this by using the rate return on alternate investments to help determine the rate for discounting benefits. This method is logically incorrect unless the regulatory benefits and the alternate investments have the same temporal profiles. Essentially, in applying the investment rate of return to regulatory benefits, we are comparing regulatory benefits in the year they accrue with the returns from a hypothetical private investment that would accrue in the same year. This provides a measure of opportunity cost only if the lost opportunity is indeed an investment whose returns will accrue that same year[85].

Because of this problem, economists increasingly have endorsed an alternative method of handling opportunity costs by using a "shadow price" for capital. The idea entails tracing the future returns (including reinvestments) that society loses because a government project or mandated regulatory activity has diverted capital. In other words, the method expresses the opportunity cost as a flow of returns to consumers from alternate investments. The shadow price analysis then reduces this flow to present value since it is a consumption flow analysis, we use consumer time preferences to determine the discount rate[86].

When analysts subject a government project to cost-benefit analysis, determining the alternate investment return can be quite difficult. It may depend on whether taxes or increased debt fund the projects, whether the government sells its debt abroad or domestically, the time profile of alternate private investments, the marginal propensity of consumers to save, and the extent to which private savings go toward depreciation rather than new investment[87]. Because the results are quite sensitive to initial assumptions, analysts have some concerns about the practical feasibility of this method of discounting for government-financed projects[88].

Fortunately, some recent research and analysis suggests that the problem usually is simpler when the analysis focuses on government regulations as opposed to government expenditures. Because private investments are amortized through depreciation, capital is not withdrawn permanently from the investment pool[89]. Consequently, the analyst needs to account only for the lag between the initial investment and the depreciation recovery. Alternatively, the analyst need only consider the interest payments that are passed on to consumers. Essentially, the question resembles that of determining the economic viability of a new toll road: society needs to compare the benefits received by consumers to the amortized capital costs[90].

The technicalities of determining the shadow price of capital are beyond the scope of this Article. The key point is that the rate of return on forgone private investments relates only to opportunity costs. It is not logically relevant to determining the discount rate for regulatory benefits. Those should be discounted (if at all) by using the social discount rate, which is normally much lower.

IV. EQUITY TOWARD FUTURE GENERATIONS

A. The Scope of Intergenerational Responsibility

Discounting favors regulations that confer benefits in the present or near future over regulations whose benefits society realizes at a later date. One might even say that the purpose of discounting is to favor present benefits over future benefits. Discounting also will generally favor regulations that produce short-term benefits and long-term costs[91]. Even a modest discount rate will favor small benefits conferred today over much larger benefits conferred in the distant future.

A simplified hypothetical illustrates the import of these observations. Assume society is considering two proposals for construction of a nuclear waste repository. For the sake of simplicity, also assume that the two proposals have equal monetary costs, that society incurs those costs in the same year, and that construction of either repository would be completed in a single year. The first option is to build a repository that will last for 500 years, but will almost certainly leak radiation and cause one billion deaths at the end of the 500-year period. Suppose also that we know that the construction of the repository proposed in Option one will result in the loss of no lives. The second option, because of construction hazards inherent in its design, will likely result in the death of at least one, but probably no more than two workers in the year of construction. The second option will not leak in 500 years and thus will not cause any deaths in 500 years. Finally, assume a five percent discount rate.

Although unhappy with the choice, most members of society would probably prefer to save one billion future lives at the cost of one current life, even though society would not receive the benefit for five centuries. However, if a policymaker applied cost-benefit analysis using discounted benefits, she will choose the first option because one billion lives 500 years hence have a lower present value than one life today[92].

Although the above hypothetical is exaggerated, it vividly illustrates how discounting may discriminate against the future[93]. Even in more realistic scenarios, compound discounting often reduces large benefits in the far future to present insignificance. Our previous discussion concerned regulations whose benefits and costs will accrue primarily to the same generation that promulgated the regulation. When a government regulatory decision confers costs or benefits on future generations, additional issues arise[94].

The most compelling questions regarding intergenerational effects of discounting pertain to the rights of future generations and obligations of the present generation to the future. Although philosophical debate about those questions extends beyond the scope of this Article, it is probably safe to assume that most people agree we have at least some responsibilities to consider and provide for the welfare of future generations[95]. Proceeding on that assumption, one facet of the debate about discounting focuses on what discount rate, if any, comports with our responsibility toward future generations. We will begin by briefly canvassing some of the common arguments on the subject.

One argument in favor of discounting benefits to future generations is that, without discounting, the present generation would sacrifice all consumption, because the total benefits to infinite future generations will always exceed any cost to a single current generation[96]. However, that argument proves persuasive only if society intends to maximize net benefits over time, i.e., intergenerational efficiency[97]. Society may also prefer to distribute benefits equitably among generations. If, instead of intergenerational efficiency, society cares about intergenerational equity, it does not need discounting to protect the legitimate interests of the present generation against the claims of the future[98].

An intermediate position might attempt to integrate the goals of efficiency and equity. One possibility is for society to discount future benefits but limit the total discount that it could apply to any future benefit. This method would prevent discounting from diminishing benefits below a certain level and avoid the kind of trivialization of distant future effects epitomized in the nuclear waste repository hypothetical[99].

Another argument that supporters of discounting future benefits sometimes advance is that future generations will be wealthier thus, our descendants will value any marginal unit of benefit less because it will represent a smaller portion of their total wealth. That "diminishing marginal utility" argument provides little support, however, for discounting future lives saved by regulation. The assumption that future generations will have greater wealth seems somewhat less assured today than as recently as thirty years ago. Even assuming that present conditions justify such optimism, little evidence exists of an inverse relationship between wealth and the value accorded to life and health. The reverse is probably true: future generations may place a higher monetary value on human health relative to other goods if their standard of living increases[100]. The higher environmental, health, and safety standards in wealthy developed countries suggest that such a relationship exists between societies in the current generation[101].

We do not find any of the conventional arguments strongly persuasive. Without pretending to provide a definitive statement regarding duties toward future generations, however, we do think that agreement on some basic points may facilitate progress toward a practical solution.

Because we will appeal at several points to commonly held views about intergenerational responsibilities, we first should clarify what role these conventional views play in the analysis. We believe that in a democratic society, popular values are entitled to prima facie acceptance in public decisionmaking. This does not mean that decisionmakers (whether legislators, administrators, or judges) must slavishly follow public opinion, but only that they should have some adequate grounds for deviation. In particular, when the values in question are as basic as the ones we are about to discuss, decisionmakers should not deviate from those values without strong reasons, which we have not identified in this context. Moreover, because we are dealing with such long-term issues, even a decisionmaker who gives no weight to current public opinion must be concerned with the public's future views. To be sustainable, a long-term environmental program must be capable of maintaining public support over the long haul otherwise, the program cannot hope to survive long enough to be effective. Of course, decisionmakers may sometimes gamble on the future, hoping that public opinion will shift in their direction. We are skeptical, however, that most people are likely to have a radical change of heart about such fundamental personal questions as their own responsibilities toward their children and grandchildren.

As a practical matter, members of the current generation probably are unwilling to make greater sacrifices for anonymous members of future generations than they are for their own personal descendants. Thus, feelings of obligations toward descendants provide an upward practical bound on obligations toward future generations as a whole[102]. If everyone in the current generation had equal wealth, each would undertake to save enough for her own descendants in order to provide this level of future welfare[103].

With respect to private goods, intergenerational effects raise no special problems because the decisions of individuals to save for their descendants satisfies society's obligation to future generations. As to public goods[104] such as environmental quality, the situation is more complex. Each member of the current generation likely would be willing to sacrifice some current consumption in order to assure his descendants' access to public goods. As usual in public good situations, however, each member cannot do this without providing a free ride--in this situation, to other peoples' descendants. The optimum social decision requires the current generation as a whole to sacrifice the collective consumption needed to provide the desired level of public goods in the future. In other words, with respect to public goods, we can no longer consider each family separately but must consider each generation collectively. However, the objective remains to approximate the level of sacrifice that each family individually would undertake willingly, in the absence of a free ride, to provide the benefits of public goods to their descendants alone. The aggregate of those individual sacrifices would provide the necessary collective sacrifice required of the current generation.

Unfortunately, empirical measurement of the amounts individuals are willing to sacrifice for a future public good would encounter all the difficulties--perception, imperfect information, etc.--inherent in the estimation of individuals' risk and time preferences and individual valuations of human life[105]. These practical measurement difficulties seem to necessitate the use of a proxy measure. As a practical matter, the responsibility to provide for personal descendants probably provides the best benchmark for this generation's obligations to future generations.

This benchmark enables us to invoke some widely shared intuitions. First, whether the language of "moral obligation" is appropriate when considering unborn descendants is not clear. If your great-grand parents squandered the family fortune, you may feel that they acted reprehensibly, but you would have difficulty charging them with violating a personal obligation toward you or with violating a "right" that you possessed. For this reason, we think the language of "responsibility" rather than "obligation" is more appropriate: mature individuals behave responsibly with respect to the interests of their descendants, but do not necessarily owe a "duty" to as-yet nonexistent individuals. Our point is not that the interests of future generations place no constraints on the current generation, but that "rights talk" is a problematic way of discussing the ethical issues.

Second, nothing requires members of the current generation to maximize the income of their descendants, with or without a discount factor. They are not even required to ensure future income levels equal to their own: we would not necessarily consider it irresponsible for extremely rich parents to leave their children only moderately rich. For this reason, the current generation is not truly a trustee with a moral obligation to preserve the entire corpus for future generations[106]. Responsible individuals do attempt, however, to ensure that their descendants can enjoy a decent standard of living, at least if they can do this without extreme self-sacrifice. You would have grounds for complaint if your great-grandparents had taken actions that consigned you to poverty in order for them to live a life of luxury. Again, it might be improper to say that they had violated the "rights" of their future descendants, but they clearly would have acted irresponsibly.

Third, whether or not it is rationally defensible, we think that members of the current generation are felt to have a more compelling obligation toward the next generation (and perhaps at least to young grandchildren) than to later generations[107]. Members of the current generations would be subject to criticism if they did not give the long-term welfare of their children substantial weight any large discount factor significantly undercuts this responsibility.

Thus, in weighing extremely long-term benefits (more than about one generation in the future), discounting is not a particularly useful technique. This generation's responsibility to later generations seems to involve a side constraint necessary to ensure them a minimum level of welfare, rather than weighing their welfare against our own as part of a maximization problem. As a practical matter. we probably cannot project benefits with even minimal confidence over long periods such as over a century. Even if we could predict some benefits with a degree of accuracy over such long periods, today's generation likely would refuse to make severe sacrifices simply to create marginal improvements in the welfare of distant future generations. We can, however, realistically attempt to avoid substantial risks of future disaster to remote descendants. With few exceptions, these risks will pose dangers to the next generation as well, so our concern for the next generation will usually subsume these very long-term effects.

A maximization approach may have more relevance to decisions affecting the next generation or so, meaning that we might reasonably apply some discount factor. Arguably, we should weigh the welfare of our (collective) children equally with our own. In any event, society cannot set the discount factor too high, since it must accord significant weight to the interests of the next generation. In particular, the discount rate even for economic benefits cannot significantly exceed the expected long-term rate of economic growth otherwise, we would discount even the destruction of most future Gross Domestic Product to a low present value over periods of only decades[108]. Practically, these considerations require a discount rate no greater than one or two percent.

B. Intergenerational Opportunity Costs

So far, we have been concerned about the problem of discounting benefits that future generations will experience. As we stressed above, this is a separate problem from evaluating opportunity costs. Lawrence Summers, the World Bank's chief economist, has invoked opportunity costs as an argument for a high discount rate for benefits accruing to future generations:

Each project must have a higher return (taking account of both pecuniary and non-pecuniary benefits) than alternative uses of the funds. Standard public non-environmental investments like sewage-treatment facilities, education programmes, or World Bank transport projects have returns of more than 10%. Most private investors apply even higher "hurdle rates" in evaluating investments, generally 15% or more, because higher-return alternatives are available.

Once costs and benefits are properly measured, it cannot be in posterity's interest for us to undertake investments that yield less than the best return. At the long term horizons that figure in the environmental debate, this really matters. A dollar invested at 10% will be worth six times as much a century from now as a dollar invested at 8%. . . . [109]

By this point, the fallacy in Summers's argument should be clear. Using the higher discount rates to measure opportunity cost assumes the actual alternative investments were projects having benefits that compounded over a century. This is unrealistic. If the typical government project has a twenty-year life (and the typical private project probably has a much shorter life) then at the end of the twenty years, consumers may receive a high return on the investment. Often, only a small part of that consumer return will be reinvested voluntarily in a new project because the return from that project will be in a nonmonetary form, incapable of reinvestment in that form. Moreover, the marginal propensity to save is, in any event, far below unity.[110]. Using the more appropriate "shadow price of capital" approach, the proper discount rate that society should use to evaluate a project over the century is much lower than the return on any short-term project.

Although Summers does not directly address this point, he may have in mind a different scenario. The higher discount rate would be appropriate if we could make a binding commitment today to invest in higher return projects (such as those of the World Bank) and to reinvest all of the proceeds of the projects in new Bank projects. The problem is that we cannot make meaningful irrevocable commitments regarding government (let alone private) actions over many decades.

For precisely this reason, environmental investments may offer a useful opportunity for precommitment. We may obtain higher returns for the next generation by making investments today that pay lower annual returns but over longer periods. In this respect, social decisionmaking may properly incorporate some of the procedures used by individuals, who make different investments at different interest rates in the interests of precommitment. Environmental protection may be the Societal equivalent of the "Christmas club," in which this generation invests at low returns simply to protect ourselves from wavering commitments (here, as a collectivity, rather than as individuals). Eliminating carcinogens may be a psychologically appealing savings plan. It also may be easier to protect a rain forest or the ozone layer--which might produce a two-percent annual return over a century at the cost of $1 billion in current consumption--than to give $1 billion to the World Bank now and commit ourselves and our descendants to the progressively larger future contributions to the Bank necessary to reinvest fully all of the benefits of Bank projects. This generation probably could preserve the rain forest more easily than a government fund, because of the forest's vividness as a tangible symbol of the heritage of "capital" passed down between generations. Similar reasoning may justify a "sustainability" requirement, which would require maintaining the world's "stock of natural capital,"[111] as a method of maintaining intergenerational savings.

There is a more general point here. In considering opportunity costs, society should consider only other opportunities that it might actually implement in short, it should choose among the most desirable of the feasible alternatives. In the interest of environmental protection, people might willingly sacrifice $1 billion of current consumption. This does not necessarily mean that they would desire to pay an extra $1 billion in taxes to finance World Bank development projects, or to save an extra $1 billion for private investment. Instead, absent the environmental regulation, they simply might consume the extra $1 billion. Thus, in considering the opportunity cost of environmental decisions, society must determine which are realistic political and social alternatives.

Returning to the familial context we explored earlier, parents who wish to ensure their offspring's inheritance may have difficulty putting aside savings for this purpose. They may find it easier (though in some sense less efficient) to hold onto some family heirlooms, even though those heirlooms appreciate in value more slowly than some other investments. We suggested earlier that the present generation does not actually act as a trustee for the future the ethical responsibilities of the present generation are more complex than the trust relationship implies. Nevertheless, in some contexts acting as if members of the present generation are trustees may be useful. A stewardship ethic may function as a way of committing the present generation to savings for future generations in a situation in which society considers it difficult otherwise to carry out long-term plans that it considers ethically desirable. Such a stewardship ethic does not require that this generation give great weight to the interests of distant generations. Instead, it merely requires this generation to maintain its global inheritance intact during its children's lives, leaving it to them to apply the same ethic to their own successors. Like runners in a relay race, society may do best when it concentrates on passing the baton to the next runner, leaving the rest of the race to the succeeding runners.

Some readers may think that this approach is short-sighted because it stresses commitments to nearby generations over those farther into the future. We do not believe that our approach slights the long-term interests of the human race. Our approach concerns planning for the full life-spans of this generation's children. This substantially increases the time horizons typically used by today's politicians[112].

Moreover, we have doubts about the workability of any horizon much longer than the life of the next generation. Motivating individuals to make sacrifices for returns that are delayed much longer than the lifespans of their own children would be very difficult. For this generation to design democratic institutions that would keep a given social program in place for such long time periods would be even more difficult. Thus, as a practical matter any policy choice made today has only a finite period of effectiveness. Finally, even if this generation could "lock in" policy choices for many generations, it probably would choose not to do so. This generation has extremely poor information about long-term policy impacts, and present decisions will undoubtedly require later corrections. Trying to forecast and solve the problems of our distant descendants would be a mistake. The present generation will do well enough if it leaves its successors a livable world and well-designed institutions with which to make their own choices.

We earlier rejected the idea that the current generation is morally a trustee for the overall welfare of future generations[113]. Nevertheless, our analysis suggests that for society to think in terms of a more limited "trust" may be useful. First, the current generation may have difficulty meeting its own savings goals for future generations, and it may be useful to treat aspects of the ecosystem as if they were family heirlooms as a technique of increasing savings. Second, the current generation also has at least a responsibility to leave later generations the minimum requirements for decent lives, which means avoiding any severe, irreparable environmental damage. Depending on the level of sensitivity of the global ecosystem, this may place substantial constraints on current decisions.

V. IMPLICATIONS FOR COST-BENEFIT ANALYSIS

Some advocates of cost-benefit analysis seem to view it as providing an objective, reliable standard for policy decisions. We reject the view that cost-benefit analysis defines the right answer for both normative and practical reasons.

First, at most cost-benefit analysis can show only that the benefits of a policy exceed its costs: that is, the winners could afford to compensate the losers for their losses[114]. This standard can be problematic even when dealing with small policy changes and short periods of time, because it fails to address distributional effects[115]. With larger policy changes--large enough to have ripple effects on prices and out puts--the application of this standard becomes more debatable. No unambiguous way may exist for deciding which of two very different economic states leaves consumers better off[116]. Long time spans compound these effects. The compensation standard becomes fanciful when the question is whether individuals yet to be born would willingly pay compensation (via a time machine?) to today's consumers. Thus, cost-benefit analysis becomes increasingly questionable as a normative standard when the current generation considers choices with global or very long-term impacts.

Notorious questions exist concerning the validity of the willingness-to-pay standard for valuing outcomes. Government regulations often involve risks for which no private market exists. For example, there is no private market in which consumers pay for changes in the carcinogen content of their families' air. Economists estimate the value of those changes to consumers based on other estimates (themselves not very reliable) of what people willingly pay to avoid safety hazards in the workplace. If a market for safe air existed, prices might well diverge from those in the employment safety market. In reality, studies of how people evaluate various risks suggest that prospective employees place importance on many factors other than mortality rates[117]. Thus, the preferences at issue are somewhat hypothetical and assignment of pre-rise values elusive.

This becomes even more apparent when we consider long-term risks. Some researchers have asked people to choose between saving some number of lives today and saving a greater number in the future[118]. We doubt that these results measure some preexisting preference, that in some sense is already present in people's heads. Why should people possess preferences about choices they have never had to make and reasonably can expect to have no future power over? Instead, the responses are simply the efforts of individuals to comment, without very much opportunity for thought, on a hard issue of public policy. In short, they most likely are exhibiting offhand opinions on the same policy issue to which the cost-benefit analyst purports to give his own answer, not private preferences that might be reflected in their own market transactions. Asking people for an instant opinion on an issue is an interesting enterprise, but not a promising method for making hard decisions.

Quite apart from these normative questions, as we have seen, cost-benefit analysis as a practical matter is far from being a determinative technique. The problems we have seen with determining the proper discount rate merely exemplify this. Equally difficult problems persist in determining the proper figure to use for the value of human life or the intrinsic value of living in a world with redwoods, whales, and rain forests[119]. Trying to establish quantitative risk estimates is even more speculative. Because of the severe limits on current scientific knowledge, we often can do little more than make educated guesses about the effects of a chemical on human health or on the greenhouse effect. As a result of these uncertainties, cost-benefit analysis can really only identify a few highly promising projects or rule out extremely poor projects[120]. Most decisions fall into a grey area in which the cost-benefit analysis turns on discretionary technical choices. Hence, cost-benefit analysis can often serve most effectively as a method of triage.

Thus, we reject the view that cost-benefit analysis provides the solution to the problems of weighing various policy options and their ramifications. On the other hand, environmental regulation does involve difficult tradeoffs, and economic analysis, including cost-benefit analysis, can help clarify those trade-offs. For example, establishing the "shadow price" of capital illuminates the extent of total consumption that society sacrifices because of a government regulation or project. Similarly, if we determine the extent to which people demand compensation for safety risks in labor markets, we have at least a starting point in considering the extent to which society should sacrifice to eliminate other risks. And if the question is whether to reduce current consumption for future benefits, examination of private savings rates gives us some guidance. If people are unwilling to save at a zero percent interest rate, the government should not undertake such savings on their behalf without some good reason to believe that private preferences have gone awry. Cost-benefit analysis thus incorporates useful factors, but some times makes the mistake of seeking to turn guidelines and insights into definitive answers.

Our conclusions should not be taken as an attack on economic analysis. On the contrary, economists themselves fully realize the limits of cost-benefit analysis. As Robert Lind has said:

Choosing the proper discount rate seems to be the most esoteric of technical issues. Certainly, perusing a page or two of the dense equations in the economics literature does little to dissipate that impression. But this problem actually involves both fundamental questions about the operation of the economy and profound issues regarding this generation's responsibility toward the future. It would be highly presumptuous for us to purport to provide a definitive resolution to technical issues that divide leading economists or to other problems that are hotly debated by professional philosophers.

On the other hand, real world decisions about public policy cannot await a definitive academic consensus. If policymakers view cost-benefit analysis as a technique for organizing information and clarifying tradeoffs, it becomes less important to settle on a precise figure for the discount rate and more important to understand the policy dimensions of that determination. One of the primary goals of this Article has been to "unpack" the debate over discounting so that readers can more knowledgeably make their own assessments of the proper treatment of future regulatory effects.

In dealing with issues of this complexity, identifying the right answer is often difficult, but ruling out some wrong answers is easier. Unfortunately, for many years, OMB has implemented a defective policy regarding discount rates[122]. As with the deficit,[123] society has been saddled with policies that increase short-term consumption at the expense of long-term welfare. The consequence has been to encourage myopia by regulatory agencies.

We have also tried to articulate a working approach to the issues for use by policymakers. Briefly, we have four recommendations:

(1) Policymakers should discount intragenerational environmental benefits at the social discount rate (one percent or so).

(2) They should assess opportunity costs of regulations using the "shadow price" of capital if possible[124].

(3) Society's concern about future generations should focus mostly on the welfare of the next generation, although it should be careful not to expose later generations to serious deprivation (including major ecological damage).

(4) With respect to the next generation, policymakers should use a low discount rate (probably around the social discount rate).

One of the cliches of recent public life has been that our society is "eating its seed corn." We believe that renewed attention to the future is a national priority. In technical terms, this requires a changed approach to discounting.

2. Under its proposed reduction of the regulatory discount rate to seven percent, OMB would calculate the value of a life in 20 years at $260,000. See notes 10 and 122 and accompanying text.

Throughout this Article, we will assume that inflation has been "factored out," so that both interest rates and dollar amounts are given in "real" rather than "nominal" terms.

3. OMB Circular A-94 at 4 (1972). For an introductory treatment, see Zygmunt Plater, Robert Abrahams, and William Goldfarb, Environmental Law and Policy 59-63 (West, 1992). For the neophyte, Part II.B of this Article explains the terms "discount rate" and "present value."

The issue of discounting the benefits of environmental regulation figured to play a prominent role in the confirmation controversy over Supreme Court nominee Douglas Ginsburg in 1987, before Ginsburg withdrew his name from nomination. As chief of regulatory policy at OMB in 1985, Ginsburg reportedly forced EPA to withdraw proposed asbestos bans because the costs of the project outweighed discounted future benefits, including human lives saved. According to a New York Times account. OMB assigned a $1 million value to each life saved by regulation, but due to long latency periods of asbestos-related cancer, OMB fixed the discounted value of the "benefit" of saving a life at only $22,000. A contemporary report by the U.S. House Committee on Energy and Commerce characterized such a calculus as "morally repugnant." Robert Pear and Jeff Gerth, Court choice in Focus: A Portrait of Ginsburg, N.Y. Times A1 (Nov. 1, 1987). More recently, then-Senator Albert Gore, Jr. vigorously attacked the use of discounting. See Albert Gore, Jr, Earth in the Balance: Ecology and the Human Spirit 190-91 (Houghton Mifflin, 1992).

8. Corrosion Proof Fittings, 947 F.2d at 1218. The court made several comments on EPA discounting practices:

i. Because the EPA discounted future costs of the regulation, primarily costs of compliance to asbestos products manufacturers, it must discount future benefits "to preserve an apples-to-apples comparison."

ii. The EPA must discount "non-monetary" benefits (primarily human lives saved).

iii. The correct time to discount benefits from elimination of asbestos is the time of injury, not the time of exposure to asbestos used by the EPA. (This is significant because a long latency period generally elapses between exposure to asbestos and the onset of asbestos-related disease).

iv. The EPA must quantify and discount benefits for a period longer than 13 years in the future.

v. "[S]oon-to-be-incurred costs are more harmful than postponable costs."

Id. at 1218-19. For commentary on Corrosion Proof Fittings, see Robert Percival, et al., Environmental Regulation: Law, Science and Policy 565-70 (Little, Brown, 1992).


ACKNOWLEDGMENTS

This paper formed the basis for the Coase lecture, delivered by Jean Tirole at the London School of Economics on 19 February 2009. We are grateful to Francesco Caselli and Augustin Landier for valuable comments. Bénabou gratefully acknowledges support from the Canadian Institute for Advanced research. Jean Tirole gratefully acknowledges the funding of the chair ‘Sustainable Finance and Responsible Investment’ by the Association Francaise de Gestion (AFG) at IDEI.


Alcohol consumption and individual time preferences of Russians

This paper explores the relationship between socioeconomic factors—particularly, the rate of time preferences and alcohol consumption in Russia. The rate of time preferences shows an individual’s willingness to delay the utility from consumption to future periods of time. The relationship between this rate and indicators of alcohol consumption is examined separately for men and women. We find significant differences in men’s and women’s patterns of consumption of alcohol. Our findings suggest that the rate of time preferences, along with age, educational level, income, place of residence, and health substantially, affects an individual’s decision to drink alcohol. We show that employment status is endogenous to alcohol consumption and that estimating a system of binary equations is necessary.

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Literature Review and Hypothesis Development

The Impact of Air Pollution

Air pollution negatively affects people's emotions and activities. The Mehrabian-Russell (M-R) model indicates that environmental stimuli trigger emotional responses and that these emotions, in turn, influence behavior. Environmental stimuli mainly refer to the influence of environmental characteristics on the five human senses. The model proposes that environmental stimuli trigger emotional states along the three basic dimensions of pleasure, arousal, and dominance. Each emotional state is associated with certain behavioral responses, mainly acceptance or avoidance. Evans and Jacobs (1981) found that exposure to a heavily polluted environment aggravates negative emotions such as depression, anxiety, and tension. Similarly, Baumgartner (2002) and Lamers et al. (2011) noted that air pollution is associated with mood disorders and worsening depressive symptoms. Further, Li and Peng (2016) found that depression caused by air pollution can affect an individual's behavior. In terms of consumer activities, Zhang and Mu (2018) documented a significant increase in mask consumption during periods of extreme air pollution, especially masks designed to protect against PM2.5. Kang et al. (2019) empirically tested the relationship between air pollution and retail sales of consumer goods, finding that more severe air pollution was associated with a larger fall in retail sales. In addition, Li et al. (2017) argued that air pollution would have a negative effect on sales of fuel-inefficient cars. Cai and He (2016) proposed that people tend to stay in clean indoor environments and reduce outdoor travel when the weather is hazy due to health concerns. In terms of economic and financial activities, Heyes et al. (2016) found that a one standard deviation increases in PM2.5 in the environment causes a decrease in the rate of return on securities transactions. To sum up, air pollution negatively affects people's emotional states, consumption, outdoor behavior and economic activities.

With respect to the relationship between air pollution and customers' channel selection behavior, we assume that offline shopping will decrease and online purchasing will increase under severe air pollution. Retailing studies have found that the shopping environment (e.g., cleanliness, in-store air quality) affects consumers' purchasing behavior, and declining sales of stores are related to unpleasant circumstances (Kumar and Karande, 2000 Turley and Milliman, 2000 Nicholson et al., 2002 Chocarro et al., 2013 Kang et al., 2019). Meanwhile, evidence has shown that consumers have channel switching behavior among different channels (Reardon and McCorkle, 2002 Choi and Mattila, 2009 Avery et al., 2012 Kleinlercher et al., 2018 Li et al., 2020). Specifically, Reardon and McCorkle (2002) outlined that consumers' channel choices are influenced by five factors: the relative opportunity cost of time, the cost of products, the pleasure of shopping, the perceived value of products and the relative risk of channels. When external conditions are harsh, consumers are less willing to go out and visit physical stores. Exposure to smog pollution increases the risk of respiratory and other diseases and makes people feel anxious and depressed (Power et al., 2015), which adds the risk of offline shopping and reduces the customers' pleasure in visiting physical stores. Thus, customers are likely to change their purchasing channels and switch from offline channels to online channels. Based on the above discussions, we propose the following hypothesis:

H1: The proportion of online purchasing for fresh food is positively related to the degree of smog pollution.

Channel Selection Behavior

Consumers' channel selection behavior is affected by various factors, such as product category characteristics, prices, differentiated services, and consumer preferences. Chocarro et al. (2013) showed that channel selection behavior is influenced by environmental factors, time factors, and social factors. Yang et al. (2013) proposed that the perceived levels of services in different channels affect a consumer's use of a particular channel. Xu and Jackson (2019) indicated that perceived risks have a negative impact on customers' willingness to choose channels. In addition, given that online and offline channels have different characteristics that lead to different consumer experiences, consumers' channel selections are significantly influenced by the kind of shopping experiences they wish to have. Akaah et al. (1995) pointed out that non-store channels are more convenient than offline stores and provide opportunities to save time and effort. Verhoef et al. (2007) studied the consumers' research shopping behaviors, that is, searching for information and purchasing through different channels. They pointed out that cross-channel synergy has promoted this phenomenon. Schrr and Zaharia (2008) noted that consumers' channel selection habits are likely to change in the presence of promotions. In sum, consumers evaluate the costs and benefits of different consumption channels with distinct characteristics, and these evaluations are the main driver of channel migration behavior (Ansari et al., 2008).

Compared with online consumption channels, offline channels are characterized by experience and interactivity. In-store interactive activities offer action and fun, creating additional experience gains for consumers, but they do not necessarily provide specific product-related information (Hede and Kellett, 2011 Leischnig et al., 2011). Retailers can implement in-store interactive activities, turning their stores into places where people can participate and learn in entertainment activities, such as playing music, scrapbooking, painting, and even exercise (Sands et al., 2015). Many studies have found that in-store activities have a positive effect on offline store operations with heterogeneous conditions and degrees. For example, Holmqvist and Lunardo (2015) found that the recreational in-store experience positively influences the pleasure and shopping intentions of those consumers with entertainment motives. Chaney et al. (2016) revealed that in-store activities increase purchasing intentions when consumers were not aware of the goals behind the activities. Using data from 356 questionnaires collected in Indian, Kumar and Polonsky (2019) indicated that retailers' in-store activities led to increased consumers' perceived credibility, and customers' experience quality mediated this relationship. Research also found that holidays and weekends significantly impact consumers' shopping behavior, as merchants tend to concentrate their special events and interactive activities with customers around these times to entice consumers to stores (Smith, 1999 Leszczyc and Timmermans, 2001). Base on the previous literature, we assume that the retailer's in-store interactive activities can attract consumers to visit the store, which could moderate the relationship between external smog pollution and consumer channel choices. Thus, Hypothesis 2 is proposed:

H2: Stores' interactive activities have negative moderating effects on the relationship between smog and the proportion of online purchasing for fresh food.

Fresh food prices oscillate because retailers adjust each product's price based on their stocks and costs. For example, strawberries in non-harvest seasons are usually more expensive. We expect that product price fluctuation would influence customers' channel choice behavior. Online channel search can provide consumers with more price information, allowing them to obtain better deals (e.g., Bakos, 1997 Morton et al., 2001 Verhoef et al., 2007). It is easier to compare prices and information through online channels with just clicking a button, while comparing prices offline needs customers to actually explore the shop one by one (Pauwels et al., 2011 Kollmann et al., 2012). Thus, under the same conditions, those products with fluctuating prices are more inclined to be sold through online channels. Mosquera et al. (2018) also suggested that in-store services should offer a mobile app to enhance the purchasing experience through easier price comparison and real-time shock checking services. Many retailers indeed developed their own apps to provide the customers with online search services, such as Costco and Decathlon. Xu and Jackson (2019) indicated that channel advantages (e.g., easier price comparison online) positively affect customer channel choice intention. For products with high price volatility, easier price comparison makes consumers more inclined to choose online channels to purchase these foods. Thus, we propose Hypothesis 3 as:

H3: the positive relationship between smog and online purchase is more pronounced for those products with higher price fluctuations.

When smog days, there were lots of dust, pollutants, microorganisms in the air, which would not only restrain the mood of residents but also stimulate the respiratory tract, causing the cough, suffocation, shortness of breath, and other uncomfortable reactions. Smog could result in severe health damages. Some foods, such as fresh fruit, vegetable and seafood, are considered to help mitigate smog's adverse effects. These foods are rich in antioxidants and have anti-inflammatory effects, which could help clean the system, particularly the airway of human beings (Hertog and Hollman, 1996 Polyfenols, 1998). Most of these foods are light and low in calories, usually for those who want to stay healthy or lose weight. We expect consumers who have higher recognition of healthy eating are more sensitive to the adverse effects of smog and care more about how to keep healthy. They are likely to shop online instead of going outside on smog days. Thus, Hypothesis 4 is proposed:

H4: Consumers who engage more in healthy eating are more likely to purchase fresh food online when the degree of smog is higher.


V. Conclusion

The above results show, both theoretically and empirically, that the monetary trade-offs that our subjects make between time periods have interesting potential uses, but do not relate in a straightforward manner to underlying time preference parameters. What are possible ways forward for the measurement of time preferences from experimental data?

Our results show that individual time preference parameters can only be inferred from a single observation of experimental choices if the individual is a narrow bracketer. If our model holds, measured MRS is codetermined by consumption and savings choices, and without information about the marginal utility in this period, the expected marginal utility of consumption next period, and the propensity to consume, time preference parameters are not identified (see sections IID and IIF). Moreover, any observed one-off preference reversal in experimental choices for two different periods may be the result of financial shocks and therefore cannot reliably indicate present bias.

The news is slightly better if we have many observations for experimental decisions A and B, either for a group of subjects or for an individual over time. Assuming that the economy is stationary and that shocks are independent, we have shown that preference reversals toward greater patience from decision A to B can on average only occur if β < 1 30 (although the converse does not hold: absence of such reversals does not imply time consistency). If individuals are additionally subject to complete credit constraints, it is possible to directly identify δ from decision B and β from the average difference between A and B.

Outside this case and without nonexperimental data, precise individual-level identification of β and δ is not possible because experimental decisions are determined by the shape of R and savings s ⁠ . However, in equilibrium, the choice of s is itself a function of time preferences. In particular, one may conjecture that an individual with a low discount factor will save less on average, thus creating a relationship between more impatient choices and greater discounting. 31 Indeed, Krusell and Smith (2003) show that in a quasi-hyperbolic model without uncertainty, the set of equilibria and therefore equilibrium realizations of the rate of return on assets depend in monotonic ways on β and δ ⁠ . Thus, observing long-run average MRS allows some inference on time preference parameters. If a parallel result holds under uncertainty, different time-preference types will exhibit distinct (sets of) stationary equilibrium ergodic distributions and different average R ' ( s t ) ⁠ , potentially allowing a ranking of individuals by their effective discount factor. Characterizing this connection is a promising direction for future research.

Any further progress can only be made with individual-level information on both experimental choices and financial variables. One approach would be to use a structural model to identify time preference (semi)parametrically, using expression (3) for decision A and (4) for decision B. This requires measurement of wealth, consumption, and preference shocks, as well as the utility function curvature (e.g., by measuring risk aversion as suggested by Andersen et al. (2008). An advantage is that this method works even in the no-constraints case intuitively, for a given MRS and interest rate, a more patient decision maker will have a lower level of consumption today relative to tomorrow. The main disadvantage lies in the very strong data requirements. 32

A final approach would be to identify experimental subjects for whom experimental choices are informative, either because they are narrow bracketers or because their marginal utility of consumption is constant over time. This is not possible from data that contain only measured MRS. It is also not enough to observe that measured MRS is not correlated with financial shocks (as in Giné et al., 2018), as this is consistent with a household that is not narrow bracketing but is able to smooth shocks (as in the no-constraints model). Instead, the researcher would need to be able to estimate the marginal utility of consumption. If it varies but is uncorrelated with MRS, one may conclude that the subject is a narrow bracketer. If both are stable over many periods, one may conclude that the subject is either a narrow bracketer or an integrated decision maker for whom current and expected consumption utility are the same (either because the subject is not subject to shocks or can smooth these shocks) both cases would then allow the identification of β and δ from experimental choices. Finding methods to identify such subjects could be a promising avenue for future research, because the data requirements for such an exercise may be less stringent than estimating a full structural model (but note that the presence of preference shocks, which we found to be important in our sample, complicates things because marginal utility may not be monotonic in expenditure).

When a measure of time preferences is needed that does not require repeat measurements and detailed information on consumption utility, the most promising direction is probably to collect alternative experimental measures. Indeed, some authors now replace monetary with primary rewards (see McClure et al., 2007) or effort (Augenblick et al., 2015), which may be harder to arbitrage between different time periods and less affected by preference shocks (although a subject who has to carry out an experimental task or consumes a reward may still choose to reschedule other work or consumption). Another possibility may be to use hypothetical questions, assuming that they are more amenable to narrow bracketing however, it is worth noting that hypothetical discount rates have been found to be affected by changes in inflation rates, which alter effective interest rates (Krupka & Stephens, 2013). Finally, our results also support using demand for commitment to identify time-inconsistent preferences, as, for example, in Ashraf et al. (2006) and Mahajan and Tarozzi (2011).


Abstract

Individual time preference has been recognized as key driver in explaining consumers' probability to have a healthy weight or to incur excess weight problems. The term time preference refers to the rate at which a person is disposed to trade a current satisfaction for a future benefit. This characteristic may affect the extent at which individuals invest in health and may influence diet choices. The purpose of this paper is to analyse which could be the role of time preference (measured in terms of diet-related behaviours) in explaining consumers' healthy or unhealthy body weight. The analysis also considers other drivers predicted to influence BMI, specifically information searching, health-related activities and socio-demographic conditions. The survey was based on face-to-face interviews on a sample of 240 consumers living in Milan. In order to test the hypothesis, we performed a set of seven ORM regressions, all having consumers' BMI as the dependent variable. Each ORM contains a different block of explanatory variables, while time preference is always included among the regressors. The results suggest that the healthy weight condition is associated with a high orientation to the future, with a high interest in nutrition claims, a low attention to health-related claims, and a high level of education. On the opposite, the probability to be overweight or obese increases when consumers are less future-concerned and is associated with a low searching for nutrition claims and to a high interest in health claims.


Psychology of Aging

There are 8 stages of Erikson's theory, spanning from infancy into old age. Each stage involves a different crisis or challenge, that represents the central concern for that development period. Each challenge can be resolved positively or negatively

2.) Body transcendence vs Body preoccupation:
Late adulthood brings some physical decline, and aches and pains may prevent older adults from engaging in the same activities they did in their younger years. Cosmetic changes such as wrinkles. To adjust positively, older adults must rise above physical discomfort and avoid placing too much importance on appearance.

Assimilation: Tenacious goal pursuit. The first process activated when individuals detect a gap between hoped-for goals and actual circumstances. Intentional actions or efforts. Can be preventive, corrective, or compensatory. In later adulthood, such efforts are often directed toward maintaining resources and avoiding mismatches between skills and demands. Especially important goal in later life is minimizing health risks, so assimilative efforts could include modification of eating and exercise habits, Maintaining a competent and independent level of functioning, such as coping with changes in physical capabilities by assimilative actions such as installing grab bars in the bathroom, strobe lights on telephones, and emergency buttons in each room. If the continued use of assimilative strategies are clearly unattainable, the next process known as accommodation can be activated.

Accommodation: characterized by flexible goal adjustment. This method is usually unintentional. Involves reevaluating, adjusting, or even redefining personal goals and preferences in accordance with situational and personal limitations. Includes revising one's goals and aspirations and changing one's standards of self-evaluation.

External Locus of Control: When one feels that their own efforts, actions and behaviors have little to do with what happens to them. They believe positive and negative outcomes are defined by change or other outside forces.

Does the sense of personal control change over the adult lifespan?
The belief is that as people move from young to older adulthood, the become less internal and more external in their locus of control. Older adults' feelings of internal control could be influenced by how others view them. Labeling older adults as "helpless" could have a negative effect on their feelings of personal control. If older adults feel they have little control, they may lose their motivation to engage in behaviors that could actually affect what happens to them.

Primary Control processes: Actions and behaviors that influence, shape, or change the environment. Individuals use these processes to influence, shape, and change the environment to fit their needs and desires. Similar to the assimilative processes discussed earlier. Focuses on areas such as cognitive competence, social competence, or physical competence. One person might concentrate on mastering cognitive skills while another focuses on social skills. If too many attempts to achieve primary control meet with limited success or outright failure, the individual may become frustrated and discouraged and could begin to feel helpless and depressed. This is when secondary control processes come into play.

Secondary Control Processes: Characterized by actions and behaviors directed internally. Similar to accommodative processes because they involve altering goals and expectations and accepting existing realities that cannot be changed. For example, a person who tries to become an expert at computer technician on their own may become frustrated, so a secondary control would be for this person to lower the expectation of being able to learn these skills without help.


Anatomy of the credit score

This paper addresses the question of what determines a poor credit score. We compare estimated credit scores with measures of impulsivity, time preference, risk attitude, and trustworthiness, in an effort to determine the preferences that underlie credit behavior. Data is collected using an incentivized decision-making lab experiment, together with financial and psychological surveys. Credit scores are estimated using an online FICO credit score estimator based on survey data supplied by the participants. Preferences are assessed using a survey measure of impulsivity, with experimental measures of time and risk preferences, as well as trustworthiness. Controlling for income differences, we find that the credit score is correlated with measures of impulsivity, time preference, and trustworthiness.

Highlights

► We ask what determines a poor credit score. ► Credit scores are estimated using an online FICO credit score estimator. ► Trustworthiness, risk tolerance and patience are measured in experimental games. ► Credit scores are correlated with impulsivity, patience, and trustworthiness.


Delayed Reward Discounting as a Drug Abuse Endophenotype

Although approximately �% of all variance in addictive disorders is genetic risk (Goldman et al., 2005 Agrawal and Lynskey, 2008), little variance has been consistently accounted for by molecular genetic studies. In fact, candidate gene studies (assessing associations with a small number of variants in a limited number of genes) and genome-wide association studies (assessing associations with hundreds of thousands of variants across the genome) have both identified variants which are inconsistently replicated and exhibit small effect sizes (Goldman et al., 2005 Treutlein and Rietschel, 2011). This gap between high levels of heritability and specific variants of inconsistent and small effects is referred to as the “missing heritability problem” (Turkheimer, 2011). Several potential factors contribute to this issue, but perhaps two are most notable: (1) addictive disorders are highly polythetic (i.e., hundreds of combinations of symptoms can produce the same diagnosis) and (2) addictive disorders are “too far” from the genes, meaning that the proximal consequences of genetic variation may be only distantly related to the proximal risk factors for drug abuse. As a result of these obstacles, an endophenotype approach has been proposed, shifting the focus to narrower phenotypes that are putatively determined by a more limited number of genes and are more specifically associated with the disorder of focus. Endophenotypes are also intended to be mechanistically informative about the nature of genetic influences. Given both links to genetics and mechanisms of risk, endophenotypes are the natural intervention targets in the context of genetically-informed prevention.

Importantly, a number of criteria have been increasingly accepted as defining an endophenotype. These comprise evidence of the following: (1) association with the illness, meaning a link with the condition of interest (2) heritability, meaning evidence that the characteristic is influenced by genetics (3) state independence, meaning the characteristic is present when the disease is not (and is not simply a symptom of the condition) (4) present in non-affected family members at higher rates than the general population, further indicating its genetic basis and (5) co-segregation with the psychiatric illness in families, further indicating association (Gottesman and Gould, 2003).

For DRD, the first of these criteria was addressed above, in the links between the behavioral characteristic of DRD and drug abuse. Shifting to the heritability of DRD, there is robust evidence from animal and human studies. Animal studies are particularly useful for assessing heritability of traits because they allow researchers to control all aspects of the environment. The reduction in environmental variability enables isolation of the effects of genetic variability. In animal studies, researchers typically compare behaviors across inbred strains that are isogenic (i.e., entirely or nearly genetically identical Falconer et al., 1996). In the first rodent study of DRD heritability, approximately 16% of variability in DRD rates was attributable to between-strain differences in mice (Isles et al., 2004). Studies of Lewis and Fischer rodents reared in identical environments also identified systematic differences in discounting across strains that are attributable to genetic differences (Anderson and Woolverton, 2005 Madden et al., 2008 Stein et al., 2012). Finally, in a recent study, the estimated heritability across eight strains was between 43 and 66% (Richards et al., 2013). Overall, these studies largely found robust differences in DRD across rodent strain, suggesting substantial heritability of DRD.

To date, four human studies have assessed the heritability of delay discounting and all four identified evidence of heritability. Early adolescent twins were found to have genetic influences on DRD at ages 12 (30%) and 14 (51%, Anokhin et al., 2011). Additionally, in a sample of 17-year-old twins, strong evidence of heritability was found in two different DRD phenotypes (47�%, Isen et al., 2014 Sparks et al., 2014). Most recently, Anokhin et al. (2015) assessed DRD in a sample of twins and found significant heritability of both DRD indices (AUC: 46 and 62% k: 35 and 55% at age 16 and 18 respectively). The trend of increasing genetic influence in later adolescence is likely attributable to ongoing adolescent brain maturation of prefrontal regions implicated in intertemporal choice (Carter et al., 2010 Steinberg, 2010 Peters and B࿌hel, 2011 Luo et al., 2012). Taken together, both animal and human studies suggest that DRD is heritable and possesses similar rates of heritability as addiction phenotypes (i.e., �%).

In the domain of family history, rodent studies support the presence of elevated levels of DRD in non-affected family members (as compared to the general population). Specifically, three studies to date of alcohol-naïve rodents selectively bred for high- or low-alcohol preference, found that high-alcohol preferring subjects exhibited an increased rate of DRD of sucrose rewards (Wilhelm and Mitchell, 2008 Oberlin and Grahame, 2009 Perkel et al., 2015). Notably, one study did not find a difference in DRD of sucrose rewards between high- and low-alcohol preferring rodents (Wilhelm et al., 2007). Nonetheless, the majority of evidence suggests that heritability for alcohol abuse susceptibility overlaps with heritability for DRD preference, and that in subjects susceptible to alcohol abuse, impulsive DRD is present prior to alcohol exposure.

While human research has been mixed regarding the presence of DRD at elevated rates in non-affected family members, earlier studies suffered from significant methodological issues (most notably, small sample size e.g., Crean et al., 2002 Petry et al., 2002 Herting et al., 2010). A more recent highly-powered study found that in 298 healthy young adults (age M = 23), those with a family history positive for alcohol or other drug use disorders had higher rates of DRD (Acheson et al., 2011). Furthermore, the study found that impulsive DRD was significantly associated with having more parents and grandparents with alcohol and drug use disorders. Similarly, Dougherty et al. (2014) found that in 386 non-affected youth (ages 10�), those with family histories of alcohol or other drug use disorders had higher rates of DRD. These findings suggest that in studies with adequate power and a thorough assessment of family history of substance use disorders, there is evidence that non-affected family members of individuals with substance use disorders possess higher rates of DRD than the general population. Similarly, this body of research suggests that given the overlap in heritability of drug abuse and impulsive DRD, there is likely an overlap of specific genetic loci conferring risk for drug abuse and for DRD.

Relatively recent efforts have been made to determine the molecular genetic basis of DRD, primarily within dopaminergic genes. Currently, findings primarily suggest the involvement of the single nucleotide polymorphisms (SNPs) from COMT (rs4680) and ANKK1 (rs1800497), and the exon 3 variable number of tandem repeats (VNTR) polymorphism in DRD4, genes which are all implicated in dopamine neurotransmission (Boettiger et al., 2007 Eisenberg et al., 2007 Paloyelis et al., 2010 Gianotti et al., 2012 Smith and Boettiger, 2012 Gray and MacKillop, 2014). Regarding rs4680, four studies found an association between possession of the G allele and impulsive DRD in adults (Boettiger et al., 2007 Gianotti et al., 2012 Smith and Boettiger, 2012 MacKillop et al., in press), one found an association of A/A with impulsive DRD in young adults (Paloyelis et al., 2010), and another found no association (Gray and MacKillop, 2014). The A/A genotype of rs4680 is associated with a reduction in levels of catechol-O-methyl transferase enzymatic activity (an enzyme implicated in dopamine catabolism), which leads to higher levels of dopamine primarily in the prefrontal cortex (Weinshilboum et al., 1999 Chen et al., 2004 Tunbridge et al., 2004). Gianotti et al. (2012) found that reduced activity in the left dorsal prefrontal cortex (dPFC) during a resting state paradigm mediates the effect of the G allele on impulsive DRD (also see Boettiger et al., 2007). This suggests that the G allele of rs4680 reduces baseline dPFC engagement via reduced dopamine availability, leading to more impulsive decision making. The dPFC does indeed appear to be strongly implicated in impulsive decision making as it is known to impact self-control processes (Gianotti et al., 2009 Knoch et al., 2010) and the dorsolateral prefrontal cortex (dlPFC) has been shown to affect DRD rates when stimulated transcranially (discussed below). Future studies with large healthy populations are required to verify which genotype is of greatest risk and examine moderators (e.g., age effects), as one recent study’s findings suggest a U-shape curve between dopamine levels and DRD performance (i.e., too much or too little dopamine yields impulsive DRD Smith and Boettiger, 2012). Nonetheless, current research supports a relationship between COMT (rs4680) and DRD rates via dPFC dopamine levels.

The T allele of rs1800497 has been associated with DRD in two studies (Eisenberg et al., 2007 MacKillop et al., in press), and not associated in two others (Kawamura et al., 2013 Gray and MacKillop, 2014). However, considerable heterogeneity in sample demographics (e.g., healthy college students, weekly gamblers, healthy adults) and sample sizes (between 91 and 195 participants) may explain the mixed findings. The role of the rs1800497 SNP is less well understood because it is technically in the ANKK1 gene, near the DRD2 gene. However, rs1800497 is in high linkage disequilibrium with SNPs from multiple genes in this region (NCAM1-TTC12-ANKK1-DRD2, Mota et al., 2012) and is associated with dopamine D2 receptor density (Pohjalainen et al., 1998 Jönsson et al., 1999 Savitz et al., 2013). Regardless of the specific mechanism of influence of rs1800497, its association with dopamine availability and with multiple addictive genotype influences (for a review see Ma et al., 2014) suggests it should be investigated further in relation to DRD rates.

DRD4 VNTR influences intracellular levels of cyclic adenosine monophosphate to primarily impact dopamine response in the prefrontal cortex, however, the specific downstream biochemical impact of different variants of DRD4 VNTR remains relatively unclear (Oak et al., 2000) and recent studies have examined the role of rare variants rather than length of repeats (e.g., Tovo-Rodrigues et al., 2012 Michealraj et al., 2014). DRD4 VNTR and DRD has been explored in several studies, with mixed findings, and appears to have a more context dependent relationship with DRD rates. For example, one study found the combination of the long form of DRD4 VNTR and the T allele of rs1800497 to be associated with significantly higher DRD rates (Eisenberg et al., 2007), and a second study found increased DRD rates in low socioeconomic status (SES) long form carriers versus decreased DRD rates in mid-to-high SES long form carriers (Sweitzer et al., 2013). In addition, studies have reported a direct negative relationship between the long from and decreased DRD rates (Gray and MacKillop, 2014) and no direct association (Eisenberg et al., 2007 Garcia et al., 2010 Paloyelis et al., 2010 Sweitzer et al., 2013). However, the existing studies have varied widely in sample composition (e.g., healthy college students, adolescents with attention deficit hyperactivity disorder [ADHD]) and size (ranging from 68 to 546). It will be important for future studies to continue to explore the potential of DRD4 VNTR as a differential susceptibility gene (see Bakermans-Kranenburg and van Ijzendoorn, 2011) in order to determine whether the relationship between DRD and polymorphisms of varying length or rarity is contingent upon other genes or environmental stressors.

Despite some promising findings regarding the role of COMT, DRD2, and DRD4, the associations require consistent replication and the effect sizes have been relatively small. Nonetheless, current empirical findings and theory suggest a central involvement of dopamine functioning as well as possible interactions among serotonin and dopamine systems on DRD performance (Winstanley et al., 2005 Simon et al., 2013). Greater exploration of other systems related to reward processing as well as genome-wide association studies are a priority for future research. Identification of robust genetic correlates of DRD would provide insights into the neurobiological causes of variation, identifying targets for possible pharmacological and neuromodulatory interventions.

Taken together, DRD is relatively well supported as an endophenotype for addictive disorders, although the identification of specific polymorphisms responsible for variation is nascent. The initial molecular genetic studies suggest that dopamine transmission plays an important role in DRD, yet in almost all cases, the candidate loci were the ‘usual suspects’ (i.e., loci tested most frequently for associations with addictive behavior and other externalizing psychopathology). Future work that establishes the robustness of these findings and expands the genomic perspective will be essential.


Alcohol consumption and individual time preferences of Russians

This paper explores the relationship between socioeconomic factors—particularly, the rate of time preferences and alcohol consumption in Russia. The rate of time preferences shows an individual’s willingness to delay the utility from consumption to future periods of time. The relationship between this rate and indicators of alcohol consumption is examined separately for men and women. We find significant differences in men’s and women’s patterns of consumption of alcohol. Our findings suggest that the rate of time preferences, along with age, educational level, income, place of residence, and health substantially, affects an individual’s decision to drink alcohol. We show that employment status is endogenous to alcohol consumption and that estimating a system of binary equations is necessary.

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The Shadow of the Future: Discount Rates, Later Generations, and the Environment

[W]e find ourselves forced to hunt for a solution in the dark jungles of the second best[1].

If saving a life is worth spending $1 million today, how much should we spend to save a life in twenty years? The answer, according to the federal Office of Management and Budget (OMB), is $150,000[2]. OMB uses a ten percent annual "discount rate" to convert future regulatory costs and benefits into their "present value."[3] Because government regulation of carcinogens cannot be expected to affect the cancer rate for twenty or thirty years[4], OMB's choice of discount rates has dramatic implications for regulatory policy. Its choice of discount rates has even greater impact on long-term global environmental issues such as ozone depletion and the greenhouse effect[5]. For instance, if the greenhouse effect will cost society $100 billion twenty years from now, OMB's current discount rate would indicate that it is not worth spending $20 billion today to avert the harm.

Significant legal implications also accompany the discounting issue's policy ramifications. In Corrosion Proof Fittings v. EPA[6], the Fifth Circuit invalidated the Environmental Protection Agency's (EPA) carefully considered regulations of asbestos products. Among other objections to the regulations[7], the court found EPA's method of comparing the costs and benefits of an asbestos ban to be unacceptable. The court held that EPA must discount future benefits and that EPA's discounting method gave too much weight to future deaths[8]. Although our discussion concerns more than just toxics regulation, Corrosion Proof Fittings illustrates the significance of the issue not only for policy analysts but also for attorneys.

After several years of review, OMB recently proposed a substantial revision of its twenty-year-old discount policy[9]. Among other changes, OMB proposes increased guidance for government agencies in the use of discount rates in cost-benefit analysis and a reduction of the discount rate from ten percent to seven percent. Coming two decades after the last revision, OMB's current proposal seems an appropriate point to take stock of federal discount rate policy, its underlying assumptions, its impact on environmental policy choices, and its lessons for the coming decades.

This Article attempts to untangle the complex and often obscure debate about the choice of discount rates. It will emphasize the issue of discounting lives, but that issue cannot be readily separated from the broader problem of discounting other regulatory costs and benefits[10]. Thus, our discussion of discounting is also directly relevant to long-term environmental issues such as biodiversity. In particular, most of the same issues arise when cost-benefit analysis seeks to incorporate the intrinsic value placed on the continued existence of an endangered species or other nonhuman lives such as whales or redwoods.

Part II briefly reviews the current role of economic efficiency and cost-benefit analysis in environmental regulation, with particular regard to the problem of assigning a monetary value to human lives. We then explain the basic concept of discounting and demonstrate the momentous impact that choice of a discount rate can have on environmental cost-benefit analyses. Part III explores the debate surrounding the selection of the proper discount rate. Part IV examines questions of fairness to future generations affected by discounting future environmental benefits. Finally, Part V considers how the discounting debate sheds light on the proper uses of cost-benefit analysis.

The discounting issue combines technical economics with philosophical conundrums. Although we will offer suggestions about the proper choice of discount rates, most of our views are necessarily tentative. Nevertheless, one point seems fairly clear: OMB has set its current discount rate too high. This has resulted in an unwarranted curtailment of important environmental regulations.

Before beginning our analysis, it may be helpful for us to explain our general perspective. Essentially, we have attempted to adopt the vantage point of a policymaker in a democratic society, and to ask how such a policymaker should think about long-term programs. Regardless of whether the policymaker uses a formal cost-benefit analysis, she will probably need to understand the trade-offs between environmental protection and economic welfare. Two kinds of trade-offs become especially important for long-term projects. First, money invested in environmental protection might otherwise have been invested in other productive assets. Thus, environmental protection may come at the cost of economic growth. Here, the trade-offs really depend upon whether environmental protection diverts funds from other investments (rather than from current consumption), not on when society receives the benefits. Second, long-term projects produce benefits in the future at the expense of consumption in the present, and the delay may affect how society evaluates the trade-off between current and future welfare. We favor an approach to discounting that treats these factors separately,[11] but even if the decisionmaker adopts a different methodology, we believe she will want to have information about both effects. We have organized our presentation accordingly.

From the vantage point of our (possibly imaginary) thoughtful policymaker, workability is more crucial than theoretical rigor. Economic theorists and professional philosophers rightly concentrate on conceptual nuances and complexities, but the policymaker needs more pragmatic solutions. Furthermore, in a democratic society, the policymaker may have some freedom of action, but also must give weight to the views of the public. For this reason, in evaluating various positions regarding discounting, we have felt free to appeal to what we believe to be generally shared value judgments.

One final introductory point, in the interests of candor. Our belief that the democratic policymaker must give weight to public opinion does not mean government by opinion poll. We believe that our society as a whole, and government in particular, focuses too much on the present and is investing too little for the future[12]. Thus, we think the policymaker should "lean against the wind" a bit, taking a longer view than the latest polls or market reports. Consequently, within the range of positions that seem reasonably supportable, we have leaned toward future-mindedness, which translates into a preference for lower discount rates.

II. A CRITICAL INTRODUCTION TO COST-BENEFIT ANALYSIS AND DISCOUNTING

A. The Role of Cost-Benefit Analysis in Environmental Regulation

Most federal environmental statutes that regulate health risks favor feasibility analysis over cost-benefit analysis[13]. For example, the Clean Air Act mandates the use of maximum achievable control technology to curb emission of hazardous air pollutants[14]. Although numerous provisions of environmental statutes require EPA to consider economic factors, none explicitly requires a formal cost-benefit analysis. Some commentators argue that economic efficiency should have little role in environmental regulation[15]. Nevertheless, in the past decade the federal government has applied cost-benefit analysis increasingly in policymaking, including environmental regulation. President Reagan's famous Executive Order 12,291, promulgated in 1981, requires agencies issuing "major rules" to conduct a cost-benefit analysis to ensure that the benefits of a proposed regulation outweigh its costs[16]. Executive Order 12,291 effectively provides a cost-benefit overlay for all major federal regulatory actions[17]. In Corrosion Proof Fittings, for instance, EPA and the Fifth Circuit independently concluded that the decisionmaking process should include a cost-benefit analysis although the statute does not explicitly require one[18].

More recently, President Bush imposed a ninety-day moratorium on new regulations. During the moratorium, agencies were instructed to existing regulations to ensure compliance with the following standards (among others):

(a) The expected benefits to society of any regulation should clearly outweigh the expected costs it imposes on society.

(b) Regulations should be fashioned to maximize net benefits to society[19].

As this executive order illustrates, economic analysis, including efficiency and cost-benefit criteria, is flourishing in federal policymaking. Cost-benefit analysis and its components, including discounting, appear likely to shape environmental policymaking for the foreseeable future.

Valuation is a key step in conducting a cost-benefit analysis. Cost-benefit analysis requires that future benefits be expressed in monetary terms. For goods freely traded on the market, such an assumption is often reasonable. However, for "non market goods" like human life (or the inherent value people place on the existence of other species), the assignment of a monetary value is much more controversial. Even assuming agreement on the propriety of "monetizing" human life, deriving an accurate value is a difficult task. Existing regulations establish values ranging from $70,000 to $132 million per life saved[20]. This tremendous range attests to the difficulty of assigning a specific monetary value to human lives saved. Similar problems hinder efforts to establish a value for the continued existence of an endangered species apart from the species' direct usefulness to humans[21].

When economists talk about placing a value on a human life, they are referring to a statistical life, not to the value of the life of any particular individual. Such valuation essentially attempts to measure what preventing the death of an unidentified person (a "statistical death") is worth to society[22]. Economists suggest several alternative methods for assigning a value to a life saved by regulation, including measures of discounted lifetime consumption, human capital (sometimes called the discounted lifetime production approach), net contribution to society, jury awards in compensation for death, and willingness to pay[23]. Each approach is open to criticism, but economists generally agree that willingness to pay is the best measure[24].

Economists generally use two methods to estimate society's willingness to pay to preserve a life. The first is to use wage differentials between risky and safe occupations to determine the increase in earnings that individuals demand for an incremental increase in risk. That increment can be extrapolated to determine the value workers implicitly place on their lives. A second method--which can also be modified to measure the value placed on endangered species or other aspects of nature--is simply to ask individuals what risk premium they require, using a "contingent valuation" survey[25].

Even assuming that we can estimate accurately what individuals are willing to pay to save a life, the use of such an estimate presents troubling difficulties. Most obviously, willingness to pay depends on ability to pay. Wealthy individuals and groups may be "willing" to pay substantially more for an increment of risk reduction than poor individuals[26]. Further, individuals may inaccurately estimate risk and incorrectly respond to these risks in terms of wage demands for a variety of reasons, including incomplete information, other market imperfections, and misperception of risk[27].

Another objection to willingness-to-pay as a measure is its dependence on the initial assignment of rights. Generally, people will require a larger payment to relinquish a right than they will pay to acquire that right[28]. In order to determine willingness to pay, the decisionmaker must first decide whether an individual already has a right to the good in question. In the asbestos situation, for example, the policymaker would need to determine in advance whether individuals have a right to a healthful, asbestos-free environment[29]. Similarly, if the government conducted cost-benefit analysis to decide whether to save whales, the result could turn on whether the initial entitlement is assigned to whalers or Greenpeace[30].

Apart from the difficulty of placing a dollar value on life, overall reductions in the levels of human mortality may not fully capture the benefits of toxics regulation. Society also may place importance on other characteristics of risks, such as potential clustering of victims[31]. Moreover, regulations may have important incidental benefits that regulators may have even more difficulty quantifying. Analysts tend to omit these "soft variables" from the analysis[32].

For example, in Corrosion Proof Fittings, EPA's calculation of the benefits of an asbestos ban focused on lives saved by the elimination of asbestos and essentially ignored other benefits[33]. Failure to include benefits like reduced treatment costs and diminished environmental degradation caused a significant underestimation of the benefits of asbestos regulation. While EPA mentioned potential illness-and-treatment costs avoided, it failed to include them in its cost-benefit calculation[34]. Similarly, though it acknowledged that an asbestos ban could produce significant ecological benefits, EPA declined to consider such advantages because it found them too difficult to quantify[35]. TSCA protects not only human health, but also the environment[36]. EPA failed to explain why it considered environmental benefits too hard to quantify, but was undaunted by the task of quantifying the benefits in terms of lives saved[37].

Even if saving lives is the primary regulatory goal, statistical deaths avoided may provide an inapt measure of the regulation's value. Placing a value on the small reduction in risk of asbestos-related death that would accrue to each individual provides one alternative to the statistical-deaths-avoided approach. Summation of all individual benefits would yield the total social benefit. Such a measure avoids some of the problems presented by placing a value on life (for example, the distortion involved in extrapolating from small risks valuations to an estimate of the value for certain death) and may more accurately reflect the actual impact of the decision[38]. On the other hand, reliable information on these valuations seems difficult to obtain. The degree to which individuals discount future health effects provides an important determinant of individual valuation of risks. This, however, simply returns us to our central concern, the problem of determining an appropriate discount rate.

B. An Introduction to Discounting

The basic principle underlying discounting is simple: A dollar today is worth more than a dollar at some time in the future. This is the same "time value" principle that underlies the concept of interest. Suppose lender L loans borrower B $100 in year one, to be repaid in year two. L will forego current use of the $100 only if B pays her a premium for that forgone use when B repays the loan in year two. That premium is interest. If B and L agree that B will pay $110 in year two for the use of L's $100 in year one, the simple interest rate is ten percent[39]. If we asked L how much $110 in year two is worth to her today, she would presumably answer "$100." L "discounts" the money she will receive in the future by ten percent. This reflects the time value of money principle: X dollars one year from now is worth less than X dollars today.

The term "present value" describes the current value to the recipient of a benefit that will be conferred in the future. In the above example, the present value to L of $110 in year 2 is $100. The ten percent rate L uses to discount the money she will receive in year two is called the "discount rate." Note that this analysis also applies to costs to be incurred in the future. Everything else being equal, L would be indifferent between paying a cost (for example, a tax) of $110 in year two or $100 today, because L discounts future costs at a simple rate of ten percent per year.

The arithmetic becomes more complicated when more than one period is involved. As money or monetary costs are conferred further in the future, compound interest decreases their present value geometrically. The formula for determining the present value of a sum to be conferred in some future year is:

where Bt represents the amount that the beneficiary will receive in future year t, r stands for the discount rate, and t represents the number of years from the present when the beneficiary receives the money[40]. By substituting the monetary value of the benefit for Bt, one can use the above formula to determine the present value of any future benefit that can be expressed in monetary terms. Analysts similarly can discount future costs expressed in monetary terms to present value[41].

The costs and benefits of a given government policy often extend over more than one year. A policy generally distributes those costs and benefits unequally over time, so simple comparison of gross costs and gross benefits would ignore the time value of money. Consequently, cost-benefit analysts generally discount all costs and benefits to present value before comparing them. The difference between the present value of all benefits and the present value of all costs of a project or regulation is often called its "Net Present Value" (NPV). A positive NPV (benefits exceed costs) suggests that the government should adopt a regulation and a negative NPV suggests that it should not.

Thus, to determine the NPV, the policymaker must derive a social discount rate that reflects the time value of the stream of costs and benefits for the entire population affected by the regulation[42]. Determination of the appropriate discount rate presents a tremendous practical problem that federal agencies have not resolved uniformly, despite prodding from OMB[43].

Though justification of the discount rate and estimates of its numerical value vary substantially, economists generally agree that cost-benefit analysis requires discounting future benefits and costs to present value. Given this consensus regarding the need for discounting, an understanding of the impact of the choice of discount rate on the results of cost-benefit analysis becomes important. As the Table on the following page illustrates, discounting can dramatically affect the value of a proposed regulation's costs or benefits,[44] depending on the size of the discount rate and the length of time before society realizes the costs or benefits. Because society often incurs the costs of environmental regulation long before the benefits,[45] compound discounting generally has a greater impact in the calculation of the present value of benefits than of costs.

Given these dramatic figures, it should be no surprise that methods of discounting are critical to cost-benefit analysis and often pivotal in regulatory decisions[47].

III. DETERMINING THE APPROPRIATE DISCOUNT RATE

Finding the correct discount rate requires a deeper analysis of why people prefer a given "quantity" of present benefit over the same "quantity" of future benefit. Economists emphasize two explanations: the opportunity cost of forgone benefits, and pure time preference (impatience)[48].

Economists base the concept of social opportunity cost on the productivity of capital. Generally, investment of resources today generates a larger quantity of resources available for future consumption. Thus, the future return from investment (which itself represents forgone present consumption) is essentially a future flow of consumption. The interest rate, and thus the discount rate, reflect the opportunity cost of relinquishing present consumption[49].

The pure time preference principle is grounded mostly in impatience people prefer receiving benefits immediately over receiving them some time in the future. Economists sometimes call the discount rate derived from this principle the Social Time Preference Rate[50]. Pure time preference also may evidence a belief that future societies are likely to be richer, making an extra dollar of benefit worth less in the future than it is to the current society. Economists often call this rationale for discounting the "diminishing marginal utility" argument. Most economists agree that the discount rate that the time preference explanation suggests--which we will call the social discount rate--is substantially lower than the rate that the opportunity cost indicates[51]. Current estimates, based on the long-term real rate of return on riskless investments (Treasury notes and bonds), are in the neighborhood of one percent[52].

In a world without taxes, the social discount rate should equal the opportunity cost. But the tax system drives a wedge between the two[53]. For example, if individuals use a two-percent discount rate for personal consumption, they will choose to save only if given a two-percent return. But to generate a two-percent return after taxes to consumers, firms must invest in projects offering a higher return. If business and personal taxes take a combined "bite" of fifty percent out of firm income by the time it reaches shareholders, the firm will need to earn a four-percent return in order to give shareholders their two-percent after-tax return. Thus, in this simple example, the social discount rate is two percent, while the implicit opportunity cost of capital is four percent. As we will see, the distinction between the social discount rate and the opportunity cost of capital has crucial importance for cost-benefit analysis[54].

A. Intragenerational Time Preferences and the Social Discount Rate

One rationale for discounting is a simple preference for a benefit today over the same benefit tomorrow. As an empirical observation of psychology, humans are often impatient[55]. However, the issue of whether impatience and preferences based on that emotion are a rational[56] or prudent basis for public policy decisions remains open for debate. Even economists generally agree that time preference provides a weaker justification for discounting than social opportunity cost. Preferences can change over time because of what one commentator describes as a "defect of the telescopic faculty."[57]. For example, a person might express a time preference for saving one life today over ten lives in twenty years, but after the twenty years have elapsed, that same person may favor saving the ten lives. If policymakers discount future benefits based on the aggregate (social) time preference at the time of the decision, they may make decisions that the society will later realize were biased imprudently in favor of small present benefits.

In some sense, saying that future consumption is less beneficial than present consumption is clearly wrong. We may currently place a lower value on the right to drink a milkshake a year from now than on drinking one today. But this does not mean that when we do drink the milkshake, it will taste any worse (or have any fewer calories). Moreover, leaving a milkshake in the freezer for a year will not result in 1.02 milkshakes at the end of the year milkshakes, like human lives, do not compound. Discounting future consumption on the basis of time preference simply reflects the fact that most people would rather drink a milkshake now than wait a year. Applying the same interest rate to harmful events like deaths implies a preference for postponing pain. Whether these preferences have any rational basis is unclear, even when ordinary consumer goods are involved, let alone human lives or endangered species[58].

Quite apart from concerns about the rationality of individual time preferences, deriving a discount factor from individual behavior is not easy. According to economic theory, rational individuals should use a single discount rate for both saving and borrowing over all time periods. The empirical evidence indicates a quite different result. Riskless investments provide a very low real rate of return, approximately one percent or so[59]. On the other hand, people are willing to borrow money at significantly higher rates, even while maintaining low-interest investments[60]. They also seem to discount future gains differently than future losses, contrary to conventional economic theory[61]. Sometimes, people even will pay money in order to save, as in the once-popular Christmas clubs. These clubs offered the opportunity to lock up funds with no interest (meaning a real loss of value, given inflation), so that individuals would have them available during the holiday season. A desire of people to precommit to various levels of savings seems responsible for least some of these disparities. This desire may make it rational to tie up some funds for a two-percent return while borrowing on a credit card at a much higher real rate[62]. As Professor Lind explains:

Turning specifically to discount rates for human lives, a recent survey conducted by economists at Resources For the Future asked a thousand Maryland households about their preferences regarding saving human life[64]. The survey results suggest that, on average, people would discount future lives saved within 25 years at an annual rate of 8.6%, but would use an annual rate of 3.4% if the time horizon is 100 years[65]. A Swedish study using a different methodology found much lower rates, in the neighborhood of .0001 percent[66]. Responses to such surveys vary remarkably. In one study, about ten percent of the respondents had negative discount rates,[67] while many others had (in effect) infinite discount rates: they refused to give any weight to deaths occurring many years in the future, on the ground that science would surely discover a method of eliminating any risk in the meantime[68]. Adding to the confusion, an econometric effort to determine how much people discount their own lives in the future derived a rate of about two percent, close to the return on riskless investment.[69]

Even putting aside the additional perplexities of intergenerational effects,[70] these studies provide few clear answers. Economic theory assumes a degree of consistency regarding intertemporal preferences that seems questionable in the real world. There are also genuine normative concerns about this kind of discounting. Nevertheless, we believe that, with respect to intragenerational effects, policymakers should use a small discount rate in the neighborhood of one or two percent[71]. Although we do not claim that this position is logically unassailable, it is supported by several pragmatic considerations.

Initially, we do not think that policymakers should set the social discount rate higher than the real rate of return on riskless investment, for several reasons. Setting the social discount rate higher than the riskless investment interest rate would imply that the population currently saves too much. (If people save at two percent interest, but discount their own future consumption at a higher rate, they are irrationally trading current consumption for a level of later consumption that they actually regard as less valuable.)[72] This implication about savings is contrary to a broad consensus among economists and the public that American savings rates are actually too low[73]. To counter this hypothetical excessive saving, the government should then run the deficit as high as possible, borrowing money at the riskless rate from foreign investors in order to finance a current spending spree. Although that fiscal policy bears an unfortunate resemblance to government actions during the 1980s, we doubt that the idea of drastically increasing the deficit would find much support[74]. This suggests that in setting the social discount rate the government should act as if the current savings rate were either optimal or too low, not as if it were too high.

Moreover, as we have seen, empirical studies show that people use a variety of discount rates in different situations. Among these rates, the return on riskless investments is arguably the most relevant. Unlike some of the empirical studies of how people would make hypothetical choices, investment rates reflect actual decisions, and therefore indicate preferences more accurately. As compared with many borrowing rates (such as those on consumer credit), investment rates are less likely to reflect impulsive decisions and are more likely to reflect thoughtful deliberation. They are also more likely to reflect long-term preferences, as opposed to short-term desires for liquidity or other effects, such as the practical unavailability of certain goods except on credit (e.g., equity ownership of housing)[75]. Finally, individuals seem to privilege their long-term investment strategies, even when this requires rather expensive efforts to protect against shorter-term impatience. This suggests that investment returns reflect their considered judgment about time preferences better than interest rates on consumer debt.

The preceding discussion suggests that policymakers should not set the social discount rate for intragenerational effects at a higher rate than the real rate of return on investments. Should they set it lower? Although the question probably has more theoretical than practical significance,[76] it is not easy to resolve. The idea of a zero rate has substantial appeal, since a death today and a death tomorrow are in some fundamental sense equal. Nevertheless, we tentatively reject use of a zero discount rate for two reasons. First, we are dealing here only with discounting within a particular generation, not with obligations to later generations[77]. This means that the same individuals are involved in both relevant time periods. The question is whether, in considering costs or benefits to a particular individual, the government should apply a lower discount rate than that individual herself applies in reasonably well-considered personal decisions. Such a policy would raise concerns about paternalism, which at least puts the burden of proof on the proponents of a zero rate.

Second, setting the discount rate at zero would leave it below the rate of return on riskless investments such as government bonds (which also supplies the discount rate for ordinary consumption)[78]. This disparity creates the possibility of paradoxical results. For example, precommitting to future regulations can become optimum for society even though the regulations are never worth their cost[79]. It seems perverse that society should precommit to adopting a regulation that society finds unwarranted today and will find equally unwarranted when it finally goes into effect.

Thus, we believe that policymakers should use the riskless investment rate as both a ceiling and a floor for the social discount rate. According to the most recent empirical evidence, this translates into a discount rate of roughly one percent[80]. Accordingly, in considering intragenerational effects, we should discount future lives, but only at a very low rate.

B. How Should Policymakers Assess Opportunity Costs?

In the previous section, we were primarily concerned with the intertemporal preferences of consumers as a reason for discounting. The fact that dollars invested to comply with regulation might otherwise have been invested provides another justification for discounting future regulatory benefits. Because the investment's benefits (saved lives) remain unrealized for several years, society "loses" the interest on the dollars that it would have obtained if society had employed those dollars elsewhere, earning interest or otherwise appreciating. Discounting accounts for the societal loss of welfare due to foregone investment opportunities[81].

It is important to realize that the opportunity cost rationale applies to the investment in regulatory compliance, not to the value of the regulatory benefits. A life saved today does not earn interest to become two lives twenty years from today. Conversely, if a regulation saves two lives twenty years from today, it makes little sense to say that the opportunity cost of saving those lives means those two future lives are only worth one life today[82]. Similarly, the question of whether full lung capacity and ability to breathe freely at age thirty is any less valuable than the same attributes at age twenty is still open[83].

If adopting a regulation decreases other investment, policymakers should take into account the loss of the possible return from alternative investments[84]. Traditionally, they have done this by using the rate return on alternate investments to help determine the rate for discounting benefits. This method is logically incorrect unless the regulatory benefits and the alternate investments have the same temporal profiles. Essentially, in applying the investment rate of return to regulatory benefits, we are comparing regulatory benefits in the year they accrue with the returns from a hypothetical private investment that would accrue in the same year. This provides a measure of opportunity cost only if the lost opportunity is indeed an investment whose returns will accrue that same year[85].

Because of this problem, economists increasingly have endorsed an alternative method of handling opportunity costs by using a "shadow price" for capital. The idea entails tracing the future returns (including reinvestments) that society loses because a government project or mandated regulatory activity has diverted capital. In other words, the method expresses the opportunity cost as a flow of returns to consumers from alternate investments. The shadow price analysis then reduces this flow to present value since it is a consumption flow analysis, we use consumer time preferences to determine the discount rate[86].

When analysts subject a government project to cost-benefit analysis, determining the alternate investment return can be quite difficult. It may depend on whether taxes or increased debt fund the projects, whether the government sells its debt abroad or domestically, the time profile of alternate private investments, the marginal propensity of consumers to save, and the extent to which private savings go toward depreciation rather than new investment[87]. Because the results are quite sensitive to initial assumptions, analysts have some concerns about the practical feasibility of this method of discounting for government-financed projects[88].

Fortunately, some recent research and analysis suggests that the problem usually is simpler when the analysis focuses on government regulations as opposed to government expenditures. Because private investments are amortized through depreciation, capital is not withdrawn permanently from the investment pool[89]. Consequently, the analyst needs to account only for the lag between the initial investment and the depreciation recovery. Alternatively, the analyst need only consider the interest payments that are passed on to consumers. Essentially, the question resembles that of determining the economic viability of a new toll road: society needs to compare the benefits received by consumers to the amortized capital costs[90].

The technicalities of determining the shadow price of capital are beyond the scope of this Article. The key point is that the rate of return on forgone private investments relates only to opportunity costs. It is not logically relevant to determining the discount rate for regulatory benefits. Those should be discounted (if at all) by using the social discount rate, which is normally much lower.

IV. EQUITY TOWARD FUTURE GENERATIONS

A. The Scope of Intergenerational Responsibility

Discounting favors regulations that confer benefits in the present or near future over regulations whose benefits society realizes at a later date. One might even say that the purpose of discounting is to favor present benefits over future benefits. Discounting also will generally favor regulations that produce short-term benefits and long-term costs[91]. Even a modest discount rate will favor small benefits conferred today over much larger benefits conferred in the distant future.

A simplified hypothetical illustrates the import of these observations. Assume society is considering two proposals for construction of a nuclear waste repository. For the sake of simplicity, also assume that the two proposals have equal monetary costs, that society incurs those costs in the same year, and that construction of either repository would be completed in a single year. The first option is to build a repository that will last for 500 years, but will almost certainly leak radiation and cause one billion deaths at the end of the 500-year period. Suppose also that we know that the construction of the repository proposed in Option one will result in the loss of no lives. The second option, because of construction hazards inherent in its design, will likely result in the death of at least one, but probably no more than two workers in the year of construction. The second option will not leak in 500 years and thus will not cause any deaths in 500 years. Finally, assume a five percent discount rate.

Although unhappy with the choice, most members of society would probably prefer to save one billion future lives at the cost of one current life, even though society would not receive the benefit for five centuries. However, if a policymaker applied cost-benefit analysis using discounted benefits, she will choose the first option because one billion lives 500 years hence have a lower present value than one life today[92].

Although the above hypothetical is exaggerated, it vividly illustrates how discounting may discriminate against the future[93]. Even in more realistic scenarios, compound discounting often reduces large benefits in the far future to present insignificance. Our previous discussion concerned regulations whose benefits and costs will accrue primarily to the same generation that promulgated the regulation. When a government regulatory decision confers costs or benefits on future generations, additional issues arise[94].

The most compelling questions regarding intergenerational effects of discounting pertain to the rights of future generations and obligations of the present generation to the future. Although philosophical debate about those questions extends beyond the scope of this Article, it is probably safe to assume that most people agree we have at least some responsibilities to consider and provide for the welfare of future generations[95]. Proceeding on that assumption, one facet of the debate about discounting focuses on what discount rate, if any, comports with our responsibility toward future generations. We will begin by briefly canvassing some of the common arguments on the subject.

One argument in favor of discounting benefits to future generations is that, without discounting, the present generation would sacrifice all consumption, because the total benefits to infinite future generations will always exceed any cost to a single current generation[96]. However, that argument proves persuasive only if society intends to maximize net benefits over time, i.e., intergenerational efficiency[97]. Society may also prefer to distribute benefits equitably among generations. If, instead of intergenerational efficiency, society cares about intergenerational equity, it does not need discounting to protect the legitimate interests of the present generation against the claims of the future[98].

An intermediate position might attempt to integrate the goals of efficiency and equity. One possibility is for society to discount future benefits but limit the total discount that it could apply to any future benefit. This method would prevent discounting from diminishing benefits below a certain level and avoid the kind of trivialization of distant future effects epitomized in the nuclear waste repository hypothetical[99].

Another argument that supporters of discounting future benefits sometimes advance is that future generations will be wealthier thus, our descendants will value any marginal unit of benefit less because it will represent a smaller portion of their total wealth. That "diminishing marginal utility" argument provides little support, however, for discounting future lives saved by regulation. The assumption that future generations will have greater wealth seems somewhat less assured today than as recently as thirty years ago. Even assuming that present conditions justify such optimism, little evidence exists of an inverse relationship between wealth and the value accorded to life and health. The reverse is probably true: future generations may place a higher monetary value on human health relative to other goods if their standard of living increases[100]. The higher environmental, health, and safety standards in wealthy developed countries suggest that such a relationship exists between societies in the current generation[101].

We do not find any of the conventional arguments strongly persuasive. Without pretending to provide a definitive statement regarding duties toward future generations, however, we do think that agreement on some basic points may facilitate progress toward a practical solution.

Because we will appeal at several points to commonly held views about intergenerational responsibilities, we first should clarify what role these conventional views play in the analysis. We believe that in a democratic society, popular values are entitled to prima facie acceptance in public decisionmaking. This does not mean that decisionmakers (whether legislators, administrators, or judges) must slavishly follow public opinion, but only that they should have some adequate grounds for deviation. In particular, when the values in question are as basic as the ones we are about to discuss, decisionmakers should not deviate from those values without strong reasons, which we have not identified in this context. Moreover, because we are dealing with such long-term issues, even a decisionmaker who gives no weight to current public opinion must be concerned with the public's future views. To be sustainable, a long-term environmental program must be capable of maintaining public support over the long haul otherwise, the program cannot hope to survive long enough to be effective. Of course, decisionmakers may sometimes gamble on the future, hoping that public opinion will shift in their direction. We are skeptical, however, that most people are likely to have a radical change of heart about such fundamental personal questions as their own responsibilities toward their children and grandchildren.

As a practical matter, members of the current generation probably are unwilling to make greater sacrifices for anonymous members of future generations than they are for their own personal descendants. Thus, feelings of obligations toward descendants provide an upward practical bound on obligations toward future generations as a whole[102]. If everyone in the current generation had equal wealth, each would undertake to save enough for her own descendants in order to provide this level of future welfare[103].

With respect to private goods, intergenerational effects raise no special problems because the decisions of individuals to save for their descendants satisfies society's obligation to future generations. As to public goods[104] such as environmental quality, the situation is more complex. Each member of the current generation likely would be willing to sacrifice some current consumption in order to assure his descendants' access to public goods. As usual in public good situations, however, each member cannot do this without providing a free ride--in this situation, to other peoples' descendants. The optimum social decision requires the current generation as a whole to sacrifice the collective consumption needed to provide the desired level of public goods in the future. In other words, with respect to public goods, we can no longer consider each family separately but must consider each generation collectively. However, the objective remains to approximate the level of sacrifice that each family individually would undertake willingly, in the absence of a free ride, to provide the benefits of public goods to their descendants alone. The aggregate of those individual sacrifices would provide the necessary collective sacrifice required of the current generation.

Unfortunately, empirical measurement of the amounts individuals are willing to sacrifice for a future public good would encounter all the difficulties--perception, imperfect information, etc.--inherent in the estimation of individuals' risk and time preferences and individual valuations of human life[105]. These practical measurement difficulties seem to necessitate the use of a proxy measure. As a practical matter, the responsibility to provide for personal descendants probably provides the best benchmark for this generation's obligations to future generations.

This benchmark enables us to invoke some widely shared intuitions. First, whether the language of "moral obligation" is appropriate when considering unborn descendants is not clear. If your great-grand parents squandered the family fortune, you may feel that they acted reprehensibly, but you would have difficulty charging them with violating a personal obligation toward you or with violating a "right" that you possessed. For this reason, we think the language of "responsibility" rather than "obligation" is more appropriate: mature individuals behave responsibly with respect to the interests of their descendants, but do not necessarily owe a "duty" to as-yet nonexistent individuals. Our point is not that the interests of future generations place no constraints on the current generation, but that "rights talk" is a problematic way of discussing the ethical issues.

Second, nothing requires members of the current generation to maximize the income of their descendants, with or without a discount factor. They are not even required to ensure future income levels equal to their own: we would not necessarily consider it irresponsible for extremely rich parents to leave their children only moderately rich. For this reason, the current generation is not truly a trustee with a moral obligation to preserve the entire corpus for future generations[106]. Responsible individuals do attempt, however, to ensure that their descendants can enjoy a decent standard of living, at least if they can do this without extreme self-sacrifice. You would have grounds for complaint if your great-grandparents had taken actions that consigned you to poverty in order for them to live a life of luxury. Again, it might be improper to say that they had violated the "rights" of their future descendants, but they clearly would have acted irresponsibly.

Third, whether or not it is rationally defensible, we think that members of the current generation are felt to have a more compelling obligation toward the next generation (and perhaps at least to young grandchildren) than to later generations[107]. Members of the current generations would be subject to criticism if they did not give the long-term welfare of their children substantial weight any large discount factor significantly undercuts this responsibility.

Thus, in weighing extremely long-term benefits (more than about one generation in the future), discounting is not a particularly useful technique. This generation's responsibility to later generations seems to involve a side constraint necessary to ensure them a minimum level of welfare, rather than weighing their welfare against our own as part of a maximization problem. As a practical matter. we probably cannot project benefits with even minimal confidence over long periods such as over a century. Even if we could predict some benefits with a degree of accuracy over such long periods, today's generation likely would refuse to make severe sacrifices simply to create marginal improvements in the welfare of distant future generations. We can, however, realistically attempt to avoid substantial risks of future disaster to remote descendants. With few exceptions, these risks will pose dangers to the next generation as well, so our concern for the next generation will usually subsume these very long-term effects.

A maximization approach may have more relevance to decisions affecting the next generation or so, meaning that we might reasonably apply some discount factor. Arguably, we should weigh the welfare of our (collective) children equally with our own. In any event, society cannot set the discount factor too high, since it must accord significant weight to the interests of the next generation. In particular, the discount rate even for economic benefits cannot significantly exceed the expected long-term rate of economic growth otherwise, we would discount even the destruction of most future Gross Domestic Product to a low present value over periods of only decades[108]. Practically, these considerations require a discount rate no greater than one or two percent.

B. Intergenerational Opportunity Costs

So far, we have been concerned about the problem of discounting benefits that future generations will experience. As we stressed above, this is a separate problem from evaluating opportunity costs. Lawrence Summers, the World Bank's chief economist, has invoked opportunity costs as an argument for a high discount rate for benefits accruing to future generations:

Each project must have a higher return (taking account of both pecuniary and non-pecuniary benefits) than alternative uses of the funds. Standard public non-environmental investments like sewage-treatment facilities, education programmes, or World Bank transport projects have returns of more than 10%. Most private investors apply even higher "hurdle rates" in evaluating investments, generally 15% or more, because higher-return alternatives are available.

Once costs and benefits are properly measured, it cannot be in posterity's interest for us to undertake investments that yield less than the best return. At the long term horizons that figure in the environmental debate, this really matters. A dollar invested at 10% will be worth six times as much a century from now as a dollar invested at 8%. . . . [109]

By this point, the fallacy in Summers's argument should be clear. Using the higher discount rates to measure opportunity cost assumes the actual alternative investments were projects having benefits that compounded over a century. This is unrealistic. If the typical government project has a twenty-year life (and the typical private project probably has a much shorter life) then at the end of the twenty years, consumers may receive a high return on the investment. Often, only a small part of that consumer return will be reinvested voluntarily in a new project because the return from that project will be in a nonmonetary form, incapable of reinvestment in that form. Moreover, the marginal propensity to save is, in any event, far below unity.[110]. Using the more appropriate "shadow price of capital" approach, the proper discount rate that society should use to evaluate a project over the century is much lower than the return on any short-term project.

Although Summers does not directly address this point, he may have in mind a different scenario. The higher discount rate would be appropriate if we could make a binding commitment today to invest in higher return projects (such as those of the World Bank) and to reinvest all of the proceeds of the projects in new Bank projects. The problem is that we cannot make meaningful irrevocable commitments regarding government (let alone private) actions over many decades.

For precisely this reason, environmental investments may offer a useful opportunity for precommitment. We may obtain higher returns for the next generation by making investments today that pay lower annual returns but over longer periods. In this respect, social decisionmaking may properly incorporate some of the procedures used by individuals, who make different investments at different interest rates in the interests of precommitment. Environmental protection may be the Societal equivalent of the "Christmas club," in which this generation invests at low returns simply to protect ourselves from wavering commitments (here, as a collectivity, rather than as individuals). Eliminating carcinogens may be a psychologically appealing savings plan. It also may be easier to protect a rain forest or the ozone layer--which might produce a two-percent annual return over a century at the cost of $1 billion in current consumption--than to give $1 billion to the World Bank now and commit ourselves and our descendants to the progressively larger future contributions to the Bank necessary to reinvest fully all of the benefits of Bank projects. This generation probably could preserve the rain forest more easily than a government fund, because of the forest's vividness as a tangible symbol of the heritage of "capital" passed down between generations. Similar reasoning may justify a "sustainability" requirement, which would require maintaining the world's "stock of natural capital,"[111] as a method of maintaining intergenerational savings.

There is a more general point here. In considering opportunity costs, society should consider only other opportunities that it might actually implement in short, it should choose among the most desirable of the feasible alternatives. In the interest of environmental protection, people might willingly sacrifice $1 billion of current consumption. This does not necessarily mean that they would desire to pay an extra $1 billion in taxes to finance World Bank development projects, or to save an extra $1 billion for private investment. Instead, absent the environmental regulation, they simply might consume the extra $1 billion. Thus, in considering the opportunity cost of environmental decisions, society must determine which are realistic political and social alternatives.

Returning to the familial context we explored earlier, parents who wish to ensure their offspring's inheritance may have difficulty putting aside savings for this purpose. They may find it easier (though in some sense less efficient) to hold onto some family heirlooms, even though those heirlooms appreciate in value more slowly than some other investments. We suggested earlier that the present generation does not actually act as a trustee for the future the ethical responsibilities of the present generation are more complex than the trust relationship implies. Nevertheless, in some contexts acting as if members of the present generation are trustees may be useful. A stewardship ethic may function as a way of committing the present generation to savings for future generations in a situation in which society considers it difficult otherwise to carry out long-term plans that it considers ethically desirable. Such a stewardship ethic does not require that this generation give great weight to the interests of distant generations. Instead, it merely requires this generation to maintain its global inheritance intact during its children's lives, leaving it to them to apply the same ethic to their own successors. Like runners in a relay race, society may do best when it concentrates on passing the baton to the next runner, leaving the rest of the race to the succeeding runners.

Some readers may think that this approach is short-sighted because it stresses commitments to nearby generations over those farther into the future. We do not believe that our approach slights the long-term interests of the human race. Our approach concerns planning for the full life-spans of this generation's children. This substantially increases the time horizons typically used by today's politicians[112].

Moreover, we have doubts about the workability of any horizon much longer than the life of the next generation. Motivating individuals to make sacrifices for returns that are delayed much longer than the lifespans of their own children would be very difficult. For this generation to design democratic institutions that would keep a given social program in place for such long time periods would be even more difficult. Thus, as a practical matter any policy choice made today has only a finite period of effectiveness. Finally, even if this generation could "lock in" policy choices for many generations, it probably would choose not to do so. This generation has extremely poor information about long-term policy impacts, and present decisions will undoubtedly require later corrections. Trying to forecast and solve the problems of our distant descendants would be a mistake. The present generation will do well enough if it leaves its successors a livable world and well-designed institutions with which to make their own choices.

We earlier rejected the idea that the current generation is morally a trustee for the overall welfare of future generations[113]. Nevertheless, our analysis suggests that for society to think in terms of a more limited "trust" may be useful. First, the current generation may have difficulty meeting its own savings goals for future generations, and it may be useful to treat aspects of the ecosystem as if they were family heirlooms as a technique of increasing savings. Second, the current generation also has at least a responsibility to leave later generations the minimum requirements for decent lives, which means avoiding any severe, irreparable environmental damage. Depending on the level of sensitivity of the global ecosystem, this may place substantial constraints on current decisions.

V. IMPLICATIONS FOR COST-BENEFIT ANALYSIS

Some advocates of cost-benefit analysis seem to view it as providing an objective, reliable standard for policy decisions. We reject the view that cost-benefit analysis defines the right answer for both normative and practical reasons.

First, at most cost-benefit analysis can show only that the benefits of a policy exceed its costs: that is, the winners could afford to compensate the losers for their losses[114]. This standard can be problematic even when dealing with small policy changes and short periods of time, because it fails to address distributional effects[115]. With larger policy changes--large enough to have ripple effects on prices and out puts--the application of this standard becomes more debatable. No unambiguous way may exist for deciding which of two very different economic states leaves consumers better off[116]. Long time spans compound these effects. The compensation standard becomes fanciful when the question is whether individuals yet to be born would willingly pay compensation (via a time machine?) to today's consumers. Thus, cost-benefit analysis becomes increasingly questionable as a normative standard when the current generation considers choices with global or very long-term impacts.

Notorious questions exist concerning the validity of the willingness-to-pay standard for valuing outcomes. Government regulations often involve risks for which no private market exists. For example, there is no private market in which consumers pay for changes in the carcinogen content of their families' air. Economists estimate the value of those changes to consumers based on other estimates (themselves not very reliable) of what people willingly pay to avoid safety hazards in the workplace. If a market for safe air existed, prices might well diverge from those in the employment safety market. In reality, studies of how people evaluate various risks suggest that prospective employees place importance on many factors other than mortality rates[117]. Thus, the preferences at issue are somewhat hypothetical and assignment of pre-rise values elusive.

This becomes even more apparent when we consider long-term risks. Some researchers have asked people to choose between saving some number of lives today and saving a greater number in the future[118]. We doubt that these results measure some preexisting preference, that in some sense is already present in people's heads. Why should people possess preferences about choices they have never had to make and reasonably can expect to have no future power over? Instead, the responses are simply the efforts of individuals to comment, without very much opportunity for thought, on a hard issue of public policy. In short, they most likely are exhibiting offhand opinions on the same policy issue to which the cost-benefit analyst purports to give his own answer, not private preferences that might be reflected in their own market transactions. Asking people for an instant opinion on an issue is an interesting enterprise, but not a promising method for making hard decisions.

Quite apart from these normative questions, as we have seen, cost-benefit analysis as a practical matter is far from being a determinative technique. The problems we have seen with determining the proper discount rate merely exemplify this. Equally difficult problems persist in determining the proper figure to use for the value of human life or the intrinsic value of living in a world with redwoods, whales, and rain forests[119]. Trying to establish quantitative risk estimates is even more speculative. Because of the severe limits on current scientific knowledge, we often can do little more than make educated guesses about the effects of a chemical on human health or on the greenhouse effect. As a result of these uncertainties, cost-benefit analysis can really only identify a few highly promising projects or rule out extremely poor projects[120]. Most decisions fall into a grey area in which the cost-benefit analysis turns on discretionary technical choices. Hence, cost-benefit analysis can often serve most effectively as a method of triage.

Thus, we reject the view that cost-benefit analysis provides the solution to the problems of weighing various policy options and their ramifications. On the other hand, environmental regulation does involve difficult tradeoffs, and economic analysis, including cost-benefit analysis, can help clarify those trade-offs. For example, establishing the "shadow price" of capital illuminates the extent of total consumption that society sacrifices because of a government regulation or project. Similarly, if we determine the extent to which people demand compensation for safety risks in labor markets, we have at least a starting point in considering the extent to which society should sacrifice to eliminate other risks. And if the question is whether to reduce current consumption for future benefits, examination of private savings rates gives us some guidance. If people are unwilling to save at a zero percent interest rate, the government should not undertake such savings on their behalf without some good reason to believe that private preferences have gone awry. Cost-benefit analysis thus incorporates useful factors, but some times makes the mistake of seeking to turn guidelines and insights into definitive answers.

Our conclusions should not be taken as an attack on economic analysis. On the contrary, economists themselves fully realize the limits of cost-benefit analysis. As Robert Lind has said:

Choosing the proper discount rate seems to be the most esoteric of technical issues. Certainly, perusing a page or two of the dense equations in the economics literature does little to dissipate that impression. But this problem actually involves both fundamental questions about the operation of the economy and profound issues regarding this generation's responsibility toward the future. It would be highly presumptuous for us to purport to provide a definitive resolution to technical issues that divide leading economists or to other problems that are hotly debated by professional philosophers.

On the other hand, real world decisions about public policy cannot await a definitive academic consensus. If policymakers view cost-benefit analysis as a technique for organizing information and clarifying tradeoffs, it becomes less important to settle on a precise figure for the discount rate and more important to understand the policy dimensions of that determination. One of the primary goals of this Article has been to "unpack" the debate over discounting so that readers can more knowledgeably make their own assessments of the proper treatment of future regulatory effects.

In dealing with issues of this complexity, identifying the right answer is often difficult, but ruling out some wrong answers is easier. Unfortunately, for many years, OMB has implemented a defective policy regarding discount rates[122]. As with the deficit,[123] society has been saddled with policies that increase short-term consumption at the expense of long-term welfare. The consequence has been to encourage myopia by regulatory agencies.

We have also tried to articulate a working approach to the issues for use by policymakers. Briefly, we have four recommendations:

(1) Policymakers should discount intragenerational environmental benefits at the social discount rate (one percent or so).

(2) They should assess opportunity costs of regulations using the "shadow price" of capital if possible[124].

(3) Society's concern about future generations should focus mostly on the welfare of the next generation, although it should be careful not to expose later generations to serious deprivation (including major ecological damage).

(4) With respect to the next generation, policymakers should use a low discount rate (probably around the social discount rate).

One of the cliches of recent public life has been that our society is "eating its seed corn." We believe that renewed attention to the future is a national priority. In technical terms, this requires a changed approach to discounting.

2. Under its proposed reduction of the regulatory discount rate to seven percent, OMB would calculate the value of a life in 20 years at $260,000. See notes 10 and 122 and accompanying text.

Throughout this Article, we will assume that inflation has been "factored out," so that both interest rates and dollar amounts are given in "real" rather than "nominal" terms.

3. OMB Circular A-94 at 4 (1972). For an introductory treatment, see Zygmunt Plater, Robert Abrahams, and William Goldfarb, Environmental Law and Policy 59-63 (West, 1992). For the neophyte, Part II.B of this Article explains the terms "discount rate" and "present value."

The issue of discounting the benefits of environmental regulation figured to play a prominent role in the confirmation controversy over Supreme Court nominee Douglas Ginsburg in 1987, before Ginsburg withdrew his name from nomination. As chief of regulatory policy at OMB in 1985, Ginsburg reportedly forced EPA to withdraw proposed asbestos bans because the costs of the project outweighed discounted future benefits, including human lives saved. According to a New York Times account. OMB assigned a $1 million value to each life saved by regulation, but due to long latency periods of asbestos-related cancer, OMB fixed the discounted value of the "benefit" of saving a life at only $22,000. A contemporary report by the U.S. House Committee on Energy and Commerce characterized such a calculus as "morally repugnant." Robert Pear and Jeff Gerth, Court choice in Focus: A Portrait of Ginsburg, N.Y. Times A1 (Nov. 1, 1987). More recently, then-Senator Albert Gore, Jr. vigorously attacked the use of discounting. See Albert Gore, Jr, Earth in the Balance: Ecology and the Human Spirit 190-91 (Houghton Mifflin, 1992).

8. Corrosion Proof Fittings, 947 F.2d at 1218. The court made several comments on EPA discounting practices:

i. Because the EPA discounted future costs of the regulation, primarily costs of compliance to asbestos products manufacturers, it must discount future benefits "to preserve an apples-to-apples comparison."

ii. The EPA must discount "non-monetary" benefits (primarily human lives saved).

iii. The correct time to discount benefits from elimination of asbestos is the time of injury, not the time of exposure to asbestos used by the EPA. (This is significant because a long latency period generally elapses between exposure to asbestos and the onset of asbestos-related disease).

iv. The EPA must quantify and discount benefits for a period longer than 13 years in the future.

v. "[S]oon-to-be-incurred costs are more harmful than postponable costs."

Id. at 1218-19. For commentary on Corrosion Proof Fittings, see Robert Percival, et al., Environmental Regulation: Law, Science and Policy 565-70 (Little, Brown, 1992).


Literature Review and Hypothesis Development

The Impact of Air Pollution

Air pollution negatively affects people's emotions and activities. The Mehrabian-Russell (M-R) model indicates that environmental stimuli trigger emotional responses and that these emotions, in turn, influence behavior. Environmental stimuli mainly refer to the influence of environmental characteristics on the five human senses. The model proposes that environmental stimuli trigger emotional states along the three basic dimensions of pleasure, arousal, and dominance. Each emotional state is associated with certain behavioral responses, mainly acceptance or avoidance. Evans and Jacobs (1981) found that exposure to a heavily polluted environment aggravates negative emotions such as depression, anxiety, and tension. Similarly, Baumgartner (2002) and Lamers et al. (2011) noted that air pollution is associated with mood disorders and worsening depressive symptoms. Further, Li and Peng (2016) found that depression caused by air pollution can affect an individual's behavior. In terms of consumer activities, Zhang and Mu (2018) documented a significant increase in mask consumption during periods of extreme air pollution, especially masks designed to protect against PM2.5. Kang et al. (2019) empirically tested the relationship between air pollution and retail sales of consumer goods, finding that more severe air pollution was associated with a larger fall in retail sales. In addition, Li et al. (2017) argued that air pollution would have a negative effect on sales of fuel-inefficient cars. Cai and He (2016) proposed that people tend to stay in clean indoor environments and reduce outdoor travel when the weather is hazy due to health concerns. In terms of economic and financial activities, Heyes et al. (2016) found that a one standard deviation increases in PM2.5 in the environment causes a decrease in the rate of return on securities transactions. To sum up, air pollution negatively affects people's emotional states, consumption, outdoor behavior and economic activities.

With respect to the relationship between air pollution and customers' channel selection behavior, we assume that offline shopping will decrease and online purchasing will increase under severe air pollution. Retailing studies have found that the shopping environment (e.g., cleanliness, in-store air quality) affects consumers' purchasing behavior, and declining sales of stores are related to unpleasant circumstances (Kumar and Karande, 2000 Turley and Milliman, 2000 Nicholson et al., 2002 Chocarro et al., 2013 Kang et al., 2019). Meanwhile, evidence has shown that consumers have channel switching behavior among different channels (Reardon and McCorkle, 2002 Choi and Mattila, 2009 Avery et al., 2012 Kleinlercher et al., 2018 Li et al., 2020). Specifically, Reardon and McCorkle (2002) outlined that consumers' channel choices are influenced by five factors: the relative opportunity cost of time, the cost of products, the pleasure of shopping, the perceived value of products and the relative risk of channels. When external conditions are harsh, consumers are less willing to go out and visit physical stores. Exposure to smog pollution increases the risk of respiratory and other diseases and makes people feel anxious and depressed (Power et al., 2015), which adds the risk of offline shopping and reduces the customers' pleasure in visiting physical stores. Thus, customers are likely to change their purchasing channels and switch from offline channels to online channels. Based on the above discussions, we propose the following hypothesis:

H1: The proportion of online purchasing for fresh food is positively related to the degree of smog pollution.

Channel Selection Behavior

Consumers' channel selection behavior is affected by various factors, such as product category characteristics, prices, differentiated services, and consumer preferences. Chocarro et al. (2013) showed that channel selection behavior is influenced by environmental factors, time factors, and social factors. Yang et al. (2013) proposed that the perceived levels of services in different channels affect a consumer's use of a particular channel. Xu and Jackson (2019) indicated that perceived risks have a negative impact on customers' willingness to choose channels. In addition, given that online and offline channels have different characteristics that lead to different consumer experiences, consumers' channel selections are significantly influenced by the kind of shopping experiences they wish to have. Akaah et al. (1995) pointed out that non-store channels are more convenient than offline stores and provide opportunities to save time and effort. Verhoef et al. (2007) studied the consumers' research shopping behaviors, that is, searching for information and purchasing through different channels. They pointed out that cross-channel synergy has promoted this phenomenon. Schrr and Zaharia (2008) noted that consumers' channel selection habits are likely to change in the presence of promotions. In sum, consumers evaluate the costs and benefits of different consumption channels with distinct characteristics, and these evaluations are the main driver of channel migration behavior (Ansari et al., 2008).

Compared with online consumption channels, offline channels are characterized by experience and interactivity. In-store interactive activities offer action and fun, creating additional experience gains for consumers, but they do not necessarily provide specific product-related information (Hede and Kellett, 2011 Leischnig et al., 2011). Retailers can implement in-store interactive activities, turning their stores into places where people can participate and learn in entertainment activities, such as playing music, scrapbooking, painting, and even exercise (Sands et al., 2015). Many studies have found that in-store activities have a positive effect on offline store operations with heterogeneous conditions and degrees. For example, Holmqvist and Lunardo (2015) found that the recreational in-store experience positively influences the pleasure and shopping intentions of those consumers with entertainment motives. Chaney et al. (2016) revealed that in-store activities increase purchasing intentions when consumers were not aware of the goals behind the activities. Using data from 356 questionnaires collected in Indian, Kumar and Polonsky (2019) indicated that retailers' in-store activities led to increased consumers' perceived credibility, and customers' experience quality mediated this relationship. Research also found that holidays and weekends significantly impact consumers' shopping behavior, as merchants tend to concentrate their special events and interactive activities with customers around these times to entice consumers to stores (Smith, 1999 Leszczyc and Timmermans, 2001). Base on the previous literature, we assume that the retailer's in-store interactive activities can attract consumers to visit the store, which could moderate the relationship between external smog pollution and consumer channel choices. Thus, Hypothesis 2 is proposed:

H2: Stores' interactive activities have negative moderating effects on the relationship between smog and the proportion of online purchasing for fresh food.

Fresh food prices oscillate because retailers adjust each product's price based on their stocks and costs. For example, strawberries in non-harvest seasons are usually more expensive. We expect that product price fluctuation would influence customers' channel choice behavior. Online channel search can provide consumers with more price information, allowing them to obtain better deals (e.g., Bakos, 1997 Morton et al., 2001 Verhoef et al., 2007). It is easier to compare prices and information through online channels with just clicking a button, while comparing prices offline needs customers to actually explore the shop one by one (Pauwels et al., 2011 Kollmann et al., 2012). Thus, under the same conditions, those products with fluctuating prices are more inclined to be sold through online channels. Mosquera et al. (2018) also suggested that in-store services should offer a mobile app to enhance the purchasing experience through easier price comparison and real-time shock checking services. Many retailers indeed developed their own apps to provide the customers with online search services, such as Costco and Decathlon. Xu and Jackson (2019) indicated that channel advantages (e.g., easier price comparison online) positively affect customer channel choice intention. For products with high price volatility, easier price comparison makes consumers more inclined to choose online channels to purchase these foods. Thus, we propose Hypothesis 3 as:

H3: the positive relationship between smog and online purchase is more pronounced for those products with higher price fluctuations.

When smog days, there were lots of dust, pollutants, microorganisms in the air, which would not only restrain the mood of residents but also stimulate the respiratory tract, causing the cough, suffocation, shortness of breath, and other uncomfortable reactions. Smog could result in severe health damages. Some foods, such as fresh fruit, vegetable and seafood, are considered to help mitigate smog's adverse effects. These foods are rich in antioxidants and have anti-inflammatory effects, which could help clean the system, particularly the airway of human beings (Hertog and Hollman, 1996 Polyfenols, 1998). Most of these foods are light and low in calories, usually for those who want to stay healthy or lose weight. We expect consumers who have higher recognition of healthy eating are more sensitive to the adverse effects of smog and care more about how to keep healthy. They are likely to shop online instead of going outside on smog days. Thus, Hypothesis 4 is proposed:

H4: Consumers who engage more in healthy eating are more likely to purchase fresh food online when the degree of smog is higher.


Delayed Reward Discounting as a Drug Abuse Endophenotype

Although approximately �% of all variance in addictive disorders is genetic risk (Goldman et al., 2005 Agrawal and Lynskey, 2008), little variance has been consistently accounted for by molecular genetic studies. In fact, candidate gene studies (assessing associations with a small number of variants in a limited number of genes) and genome-wide association studies (assessing associations with hundreds of thousands of variants across the genome) have both identified variants which are inconsistently replicated and exhibit small effect sizes (Goldman et al., 2005 Treutlein and Rietschel, 2011). This gap between high levels of heritability and specific variants of inconsistent and small effects is referred to as the “missing heritability problem” (Turkheimer, 2011). Several potential factors contribute to this issue, but perhaps two are most notable: (1) addictive disorders are highly polythetic (i.e., hundreds of combinations of symptoms can produce the same diagnosis) and (2) addictive disorders are “too far” from the genes, meaning that the proximal consequences of genetic variation may be only distantly related to the proximal risk factors for drug abuse. As a result of these obstacles, an endophenotype approach has been proposed, shifting the focus to narrower phenotypes that are putatively determined by a more limited number of genes and are more specifically associated with the disorder of focus. Endophenotypes are also intended to be mechanistically informative about the nature of genetic influences. Given both links to genetics and mechanisms of risk, endophenotypes are the natural intervention targets in the context of genetically-informed prevention.

Importantly, a number of criteria have been increasingly accepted as defining an endophenotype. These comprise evidence of the following: (1) association with the illness, meaning a link with the condition of interest (2) heritability, meaning evidence that the characteristic is influenced by genetics (3) state independence, meaning the characteristic is present when the disease is not (and is not simply a symptom of the condition) (4) present in non-affected family members at higher rates than the general population, further indicating its genetic basis and (5) co-segregation with the psychiatric illness in families, further indicating association (Gottesman and Gould, 2003).

For DRD, the first of these criteria was addressed above, in the links between the behavioral characteristic of DRD and drug abuse. Shifting to the heritability of DRD, there is robust evidence from animal and human studies. Animal studies are particularly useful for assessing heritability of traits because they allow researchers to control all aspects of the environment. The reduction in environmental variability enables isolation of the effects of genetic variability. In animal studies, researchers typically compare behaviors across inbred strains that are isogenic (i.e., entirely or nearly genetically identical Falconer et al., 1996). In the first rodent study of DRD heritability, approximately 16% of variability in DRD rates was attributable to between-strain differences in mice (Isles et al., 2004). Studies of Lewis and Fischer rodents reared in identical environments also identified systematic differences in discounting across strains that are attributable to genetic differences (Anderson and Woolverton, 2005 Madden et al., 2008 Stein et al., 2012). Finally, in a recent study, the estimated heritability across eight strains was between 43 and 66% (Richards et al., 2013). Overall, these studies largely found robust differences in DRD across rodent strain, suggesting substantial heritability of DRD.

To date, four human studies have assessed the heritability of delay discounting and all four identified evidence of heritability. Early adolescent twins were found to have genetic influences on DRD at ages 12 (30%) and 14 (51%, Anokhin et al., 2011). Additionally, in a sample of 17-year-old twins, strong evidence of heritability was found in two different DRD phenotypes (47�%, Isen et al., 2014 Sparks et al., 2014). Most recently, Anokhin et al. (2015) assessed DRD in a sample of twins and found significant heritability of both DRD indices (AUC: 46 and 62% k: 35 and 55% at age 16 and 18 respectively). The trend of increasing genetic influence in later adolescence is likely attributable to ongoing adolescent brain maturation of prefrontal regions implicated in intertemporal choice (Carter et al., 2010 Steinberg, 2010 Peters and B࿌hel, 2011 Luo et al., 2012). Taken together, both animal and human studies suggest that DRD is heritable and possesses similar rates of heritability as addiction phenotypes (i.e., �%).

In the domain of family history, rodent studies support the presence of elevated levels of DRD in non-affected family members (as compared to the general population). Specifically, three studies to date of alcohol-naïve rodents selectively bred for high- or low-alcohol preference, found that high-alcohol preferring subjects exhibited an increased rate of DRD of sucrose rewards (Wilhelm and Mitchell, 2008 Oberlin and Grahame, 2009 Perkel et al., 2015). Notably, one study did not find a difference in DRD of sucrose rewards between high- and low-alcohol preferring rodents (Wilhelm et al., 2007). Nonetheless, the majority of evidence suggests that heritability for alcohol abuse susceptibility overlaps with heritability for DRD preference, and that in subjects susceptible to alcohol abuse, impulsive DRD is present prior to alcohol exposure.

While human research has been mixed regarding the presence of DRD at elevated rates in non-affected family members, earlier studies suffered from significant methodological issues (most notably, small sample size e.g., Crean et al., 2002 Petry et al., 2002 Herting et al., 2010). A more recent highly-powered study found that in 298 healthy young adults (age M = 23), those with a family history positive for alcohol or other drug use disorders had higher rates of DRD (Acheson et al., 2011). Furthermore, the study found that impulsive DRD was significantly associated with having more parents and grandparents with alcohol and drug use disorders. Similarly, Dougherty et al. (2014) found that in 386 non-affected youth (ages 10�), those with family histories of alcohol or other drug use disorders had higher rates of DRD. These findings suggest that in studies with adequate power and a thorough assessment of family history of substance use disorders, there is evidence that non-affected family members of individuals with substance use disorders possess higher rates of DRD than the general population. Similarly, this body of research suggests that given the overlap in heritability of drug abuse and impulsive DRD, there is likely an overlap of specific genetic loci conferring risk for drug abuse and for DRD.

Relatively recent efforts have been made to determine the molecular genetic basis of DRD, primarily within dopaminergic genes. Currently, findings primarily suggest the involvement of the single nucleotide polymorphisms (SNPs) from COMT (rs4680) and ANKK1 (rs1800497), and the exon 3 variable number of tandem repeats (VNTR) polymorphism in DRD4, genes which are all implicated in dopamine neurotransmission (Boettiger et al., 2007 Eisenberg et al., 2007 Paloyelis et al., 2010 Gianotti et al., 2012 Smith and Boettiger, 2012 Gray and MacKillop, 2014). Regarding rs4680, four studies found an association between possession of the G allele and impulsive DRD in adults (Boettiger et al., 2007 Gianotti et al., 2012 Smith and Boettiger, 2012 MacKillop et al., in press), one found an association of A/A with impulsive DRD in young adults (Paloyelis et al., 2010), and another found no association (Gray and MacKillop, 2014). The A/A genotype of rs4680 is associated with a reduction in levels of catechol-O-methyl transferase enzymatic activity (an enzyme implicated in dopamine catabolism), which leads to higher levels of dopamine primarily in the prefrontal cortex (Weinshilboum et al., 1999 Chen et al., 2004 Tunbridge et al., 2004). Gianotti et al. (2012) found that reduced activity in the left dorsal prefrontal cortex (dPFC) during a resting state paradigm mediates the effect of the G allele on impulsive DRD (also see Boettiger et al., 2007). This suggests that the G allele of rs4680 reduces baseline dPFC engagement via reduced dopamine availability, leading to more impulsive decision making. The dPFC does indeed appear to be strongly implicated in impulsive decision making as it is known to impact self-control processes (Gianotti et al., 2009 Knoch et al., 2010) and the dorsolateral prefrontal cortex (dlPFC) has been shown to affect DRD rates when stimulated transcranially (discussed below). Future studies with large healthy populations are required to verify which genotype is of greatest risk and examine moderators (e.g., age effects), as one recent study’s findings suggest a U-shape curve between dopamine levels and DRD performance (i.e., too much or too little dopamine yields impulsive DRD Smith and Boettiger, 2012). Nonetheless, current research supports a relationship between COMT (rs4680) and DRD rates via dPFC dopamine levels.

The T allele of rs1800497 has been associated with DRD in two studies (Eisenberg et al., 2007 MacKillop et al., in press), and not associated in two others (Kawamura et al., 2013 Gray and MacKillop, 2014). However, considerable heterogeneity in sample demographics (e.g., healthy college students, weekly gamblers, healthy adults) and sample sizes (between 91 and 195 participants) may explain the mixed findings. The role of the rs1800497 SNP is less well understood because it is technically in the ANKK1 gene, near the DRD2 gene. However, rs1800497 is in high linkage disequilibrium with SNPs from multiple genes in this region (NCAM1-TTC12-ANKK1-DRD2, Mota et al., 2012) and is associated with dopamine D2 receptor density (Pohjalainen et al., 1998 Jönsson et al., 1999 Savitz et al., 2013). Regardless of the specific mechanism of influence of rs1800497, its association with dopamine availability and with multiple addictive genotype influences (for a review see Ma et al., 2014) suggests it should be investigated further in relation to DRD rates.

DRD4 VNTR influences intracellular levels of cyclic adenosine monophosphate to primarily impact dopamine response in the prefrontal cortex, however, the specific downstream biochemical impact of different variants of DRD4 VNTR remains relatively unclear (Oak et al., 2000) and recent studies have examined the role of rare variants rather than length of repeats (e.g., Tovo-Rodrigues et al., 2012 Michealraj et al., 2014). DRD4 VNTR and DRD has been explored in several studies, with mixed findings, and appears to have a more context dependent relationship with DRD rates. For example, one study found the combination of the long form of DRD4 VNTR and the T allele of rs1800497 to be associated with significantly higher DRD rates (Eisenberg et al., 2007), and a second study found increased DRD rates in low socioeconomic status (SES) long form carriers versus decreased DRD rates in mid-to-high SES long form carriers (Sweitzer et al., 2013). In addition, studies have reported a direct negative relationship between the long from and decreased DRD rates (Gray and MacKillop, 2014) and no direct association (Eisenberg et al., 2007 Garcia et al., 2010 Paloyelis et al., 2010 Sweitzer et al., 2013). However, the existing studies have varied widely in sample composition (e.g., healthy college students, adolescents with attention deficit hyperactivity disorder [ADHD]) and size (ranging from 68 to 546). It will be important for future studies to continue to explore the potential of DRD4 VNTR as a differential susceptibility gene (see Bakermans-Kranenburg and van Ijzendoorn, 2011) in order to determine whether the relationship between DRD and polymorphisms of varying length or rarity is contingent upon other genes or environmental stressors.

Despite some promising findings regarding the role of COMT, DRD2, and DRD4, the associations require consistent replication and the effect sizes have been relatively small. Nonetheless, current empirical findings and theory suggest a central involvement of dopamine functioning as well as possible interactions among serotonin and dopamine systems on DRD performance (Winstanley et al., 2005 Simon et al., 2013). Greater exploration of other systems related to reward processing as well as genome-wide association studies are a priority for future research. Identification of robust genetic correlates of DRD would provide insights into the neurobiological causes of variation, identifying targets for possible pharmacological and neuromodulatory interventions.

Taken together, DRD is relatively well supported as an endophenotype for addictive disorders, although the identification of specific polymorphisms responsible for variation is nascent. The initial molecular genetic studies suggest that dopamine transmission plays an important role in DRD, yet in almost all cases, the candidate loci were the ‘usual suspects’ (i.e., loci tested most frequently for associations with addictive behavior and other externalizing psychopathology). Future work that establishes the robustness of these findings and expands the genomic perspective will be essential.


Anatomy of the credit score

This paper addresses the question of what determines a poor credit score. We compare estimated credit scores with measures of impulsivity, time preference, risk attitude, and trustworthiness, in an effort to determine the preferences that underlie credit behavior. Data is collected using an incentivized decision-making lab experiment, together with financial and psychological surveys. Credit scores are estimated using an online FICO credit score estimator based on survey data supplied by the participants. Preferences are assessed using a survey measure of impulsivity, with experimental measures of time and risk preferences, as well as trustworthiness. Controlling for income differences, we find that the credit score is correlated with measures of impulsivity, time preference, and trustworthiness.

Highlights

► We ask what determines a poor credit score. ► Credit scores are estimated using an online FICO credit score estimator. ► Trustworthiness, risk tolerance and patience are measured in experimental games. ► Credit scores are correlated with impulsivity, patience, and trustworthiness.


V. Conclusion

The above results show, both theoretically and empirically, that the monetary trade-offs that our subjects make between time periods have interesting potential uses, but do not relate in a straightforward manner to underlying time preference parameters. What are possible ways forward for the measurement of time preferences from experimental data?

Our results show that individual time preference parameters can only be inferred from a single observation of experimental choices if the individual is a narrow bracketer. If our model holds, measured MRS is codetermined by consumption and savings choices, and without information about the marginal utility in this period, the expected marginal utility of consumption next period, and the propensity to consume, time preference parameters are not identified (see sections IID and IIF). Moreover, any observed one-off preference reversal in experimental choices for two different periods may be the result of financial shocks and therefore cannot reliably indicate present bias.

The news is slightly better if we have many observations for experimental decisions A and B, either for a group of subjects or for an individual over time. Assuming that the economy is stationary and that shocks are independent, we have shown that preference reversals toward greater patience from decision A to B can on average only occur if β < 1 30 (although the converse does not hold: absence of such reversals does not imply time consistency). If individuals are additionally subject to complete credit constraints, it is possible to directly identify δ from decision B and β from the average difference between A and B.

Outside this case and without nonexperimental data, precise individual-level identification of β and δ is not possible because experimental decisions are determined by the shape of R and savings s ⁠ . However, in equilibrium, the choice of s is itself a function of time preferences. In particular, one may conjecture that an individual with a low discount factor will save less on average, thus creating a relationship between more impatient choices and greater discounting. 31 Indeed, Krusell and Smith (2003) show that in a quasi-hyperbolic model without uncertainty, the set of equilibria and therefore equilibrium realizations of the rate of return on assets depend in monotonic ways on β and δ ⁠ . Thus, observing long-run average MRS allows some inference on time preference parameters. If a parallel result holds under uncertainty, different time-preference types will exhibit distinct (sets of) stationary equilibrium ergodic distributions and different average R ' ( s t ) ⁠ , potentially allowing a ranking of individuals by their effective discount factor. Characterizing this connection is a promising direction for future research.

Any further progress can only be made with individual-level information on both experimental choices and financial variables. One approach would be to use a structural model to identify time preference (semi)parametrically, using expression (3) for decision A and (4) for decision B. This requires measurement of wealth, consumption, and preference shocks, as well as the utility function curvature (e.g., by measuring risk aversion as suggested by Andersen et al. (2008). An advantage is that this method works even in the no-constraints case intuitively, for a given MRS and interest rate, a more patient decision maker will have a lower level of consumption today relative to tomorrow. The main disadvantage lies in the very strong data requirements. 32

A final approach would be to identify experimental subjects for whom experimental choices are informative, either because they are narrow bracketers or because their marginal utility of consumption is constant over time. This is not possible from data that contain only measured MRS. It is also not enough to observe that measured MRS is not correlated with financial shocks (as in Giné et al., 2018), as this is consistent with a household that is not narrow bracketing but is able to smooth shocks (as in the no-constraints model). Instead, the researcher would need to be able to estimate the marginal utility of consumption. If it varies but is uncorrelated with MRS, one may conclude that the subject is a narrow bracketer. If both are stable over many periods, one may conclude that the subject is either a narrow bracketer or an integrated decision maker for whom current and expected consumption utility are the same (either because the subject is not subject to shocks or can smooth these shocks) both cases would then allow the identification of β and δ from experimental choices. Finding methods to identify such subjects could be a promising avenue for future research, because the data requirements for such an exercise may be less stringent than estimating a full structural model (but note that the presence of preference shocks, which we found to be important in our sample, complicates things because marginal utility may not be monotonic in expenditure).

When a measure of time preferences is needed that does not require repeat measurements and detailed information on consumption utility, the most promising direction is probably to collect alternative experimental measures. Indeed, some authors now replace monetary with primary rewards (see McClure et al., 2007) or effort (Augenblick et al., 2015), which may be harder to arbitrage between different time periods and less affected by preference shocks (although a subject who has to carry out an experimental task or consumes a reward may still choose to reschedule other work or consumption). Another possibility may be to use hypothetical questions, assuming that they are more amenable to narrow bracketing however, it is worth noting that hypothetical discount rates have been found to be affected by changes in inflation rates, which alter effective interest rates (Krupka & Stephens, 2013). Finally, our results also support using demand for commitment to identify time-inconsistent preferences, as, for example, in Ashraf et al. (2006) and Mahajan and Tarozzi (2011).


Abstract

Individual time preference has been recognized as key driver in explaining consumers' probability to have a healthy weight or to incur excess weight problems. The term time preference refers to the rate at which a person is disposed to trade a current satisfaction for a future benefit. This characteristic may affect the extent at which individuals invest in health and may influence diet choices. The purpose of this paper is to analyse which could be the role of time preference (measured in terms of diet-related behaviours) in explaining consumers' healthy or unhealthy body weight. The analysis also considers other drivers predicted to influence BMI, specifically information searching, health-related activities and socio-demographic conditions. The survey was based on face-to-face interviews on a sample of 240 consumers living in Milan. In order to test the hypothesis, we performed a set of seven ORM regressions, all having consumers' BMI as the dependent variable. Each ORM contains a different block of explanatory variables, while time preference is always included among the regressors. The results suggest that the healthy weight condition is associated with a high orientation to the future, with a high interest in nutrition claims, a low attention to health-related claims, and a high level of education. On the opposite, the probability to be overweight or obese increases when consumers are less future-concerned and is associated with a low searching for nutrition claims and to a high interest in health claims.


ACKNOWLEDGMENTS

This paper formed the basis for the Coase lecture, delivered by Jean Tirole at the London School of Economics on 19 February 2009. We are grateful to Francesco Caselli and Augustin Landier for valuable comments. Bénabou gratefully acknowledges support from the Canadian Institute for Advanced research. Jean Tirole gratefully acknowledges the funding of the chair ‘Sustainable Finance and Responsible Investment’ by the Association Francaise de Gestion (AFG) at IDEI.


Psychology of Aging

There are 8 stages of Erikson's theory, spanning from infancy into old age. Each stage involves a different crisis or challenge, that represents the central concern for that development period. Each challenge can be resolved positively or negatively

2.) Body transcendence vs Body preoccupation:
Late adulthood brings some physical decline, and aches and pains may prevent older adults from engaging in the same activities they did in their younger years. Cosmetic changes such as wrinkles. To adjust positively, older adults must rise above physical discomfort and avoid placing too much importance on appearance.

Assimilation: Tenacious goal pursuit. The first process activated when individuals detect a gap between hoped-for goals and actual circumstances. Intentional actions or efforts. Can be preventive, corrective, or compensatory. In later adulthood, such efforts are often directed toward maintaining resources and avoiding mismatches between skills and demands. Especially important goal in later life is minimizing health risks, so assimilative efforts could include modification of eating and exercise habits, Maintaining a competent and independent level of functioning, such as coping with changes in physical capabilities by assimilative actions such as installing grab bars in the bathroom, strobe lights on telephones, and emergency buttons in each room. If the continued use of assimilative strategies are clearly unattainable, the next process known as accommodation can be activated.

Accommodation: characterized by flexible goal adjustment. This method is usually unintentional. Involves reevaluating, adjusting, or even redefining personal goals and preferences in accordance with situational and personal limitations. Includes revising one's goals and aspirations and changing one's standards of self-evaluation.

External Locus of Control: When one feels that their own efforts, actions and behaviors have little to do with what happens to them. They believe positive and negative outcomes are defined by change or other outside forces.

Does the sense of personal control change over the adult lifespan?
The belief is that as people move from young to older adulthood, the become less internal and more external in their locus of control. Older adults' feelings of internal control could be influenced by how others view them. Labeling older adults as "helpless" could have a negative effect on their feelings of personal control. If older adults feel they have little control, they may lose their motivation to engage in behaviors that could actually affect what happens to them.

Primary Control processes: Actions and behaviors that influence, shape, or change the environment. Individuals use these processes to influence, shape, and change the environment to fit their needs and desires. Similar to the assimilative processes discussed earlier. Focuses on areas such as cognitive competence, social competence, or physical competence. One person might concentrate on mastering cognitive skills while another focuses on social skills. If too many attempts to achieve primary control meet with limited success or outright failure, the individual may become frustrated and discouraged and could begin to feel helpless and depressed. This is when secondary control processes come into play.

Secondary Control Processes: Characterized by actions and behaviors directed internally. Similar to accommodative processes because they involve altering goals and expectations and accepting existing realities that cannot be changed. For example, a person who tries to become an expert at computer technician on their own may become frustrated, so a secondary control would be for this person to lower the expectation of being able to learn these skills without help.