ABSTRACT
The allocation of society’s resources devoted to safety must be continually appraised in light of competing needs, because there is a limit on the resources that can be expended to extend life. The Life-Quality Index (LQI) has been shown to be an effective tool for the assessment of risk reduction initiatives that would support the public interest and enhance safety and quality of life. The selection of discounting rate is a critical element of decision analysis, especially in the context of long-term risk abatement programs. A controversial feature of the classical exponential discounting is that it leads to drastically low net present value of the benefits of a long-term program. To overcome this limitation, the paper presents a time-variant hyperbolic discounting model, which incorporates a higher rate of discount in the short-term and a smaller rate in the long term. The approach is consistent with empirical evidence about the inter-temporal decisions of consumers: The LQI model is further refined with a time-variant discount rate model and applied to quantify the societal willingness-to-pay for safety.
