Saturday, December 25, 2010

Revised Report on Principles & Standards for Benefit-Cost Analysis

Richard Zerbe (Evans School, Washington) has published a revised draft of "Toward Principles and Standards in the Use of Benefit-Cost Analysis." The most significant alteration in this draft, prepared on behalf of the Benefit-Cost Analysis Center at the University of Washington, with funding from the MacArthur Foundation, is that, at my request, my name has been removed from the list of members of the Scientific Committee, who commented on early drafts of sections of the report. I wanted my name removed because, as noted in previous blog posts (here and here), the Scientific Committee did not get to see or comment on the report's recommendations for social discounting prior to publication. Those recommendations struck me as much higher than warranted by the literature, including the various white papers Professor Zerbe commissioned for this project.

All of the white papers can all be viewed here. None of them focuses predominantly on the issue of social discounting; only three of the papers even discuss social discount rates. Importantly, not one of those three papers supports the high discount rates recommended in Professor Zerbe's report. Joseph H. Cook's white paper "On Principles and Standards for Benefit-cost Analysis of Public Health Preparedness and Pandemic Mitigation Policies" finds "considerable agreement in the health evaluation field to use a real discount rate of 3%, and this rate has been codified in several cost-effectiveness guidelines" (p. 20). Lynn A. Karoly's white paper "On Principles and Standards for Benefit-cost Analysis of Early Childhood Interventions," observes the use of discount rates from 3 to 4 percent (p. 27). Finally, the white paper on "Behavioral Economics and Benefit-Cost Analysis" by Lisa A. Robinson and James K. Hammitt recommends hyperbolic discounting, with discount rates that decline over time, in stark contrast to the final report's recommendation of a single, high discount rate.

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