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Cost-Benefit Analysis as a Commitment Device

August 2016

Citation: ELR 10706

Author: Matthew Wansley

Cost-benefit analysis purports to calibrate regulation. But the way administrative agencies practice cost-benefit analysis can, at best, calibrate a rule at the moment of its promulgation. As scientific knowledge of regulated health, safety, and environmental risks accumulates—and as technology becomes more affordable—the assumptions underlying a rule’s cost-benefit analysis can rapidly obsolesce. Because of the structural incentives towards agency inaction, pressure from regulated firms, or attention to other priorities, outdated rules persist. The problem is what I call snapshot cost-benefit analysis: the administrative state’s practice of treating regulation as a one-off game by neglecting to adapt a rule when the best estimate of costs and benefits has changed. Cost-benefit analysis need not work this way. For many regulations, cost-benefit analysis could be used as a commitment device. When an agency analyzes a proposed rule, it should explicitly anticipate the adoption of a more stringent rule than the one it promulgates. The agency should then precommit to adopting the more stringent rule when a credible demonstration has been made that it has become cost-benefit justified. Just as the expected costs and benefits of a rule determine its initial level of stringency, the observed costs and benefits of a rule should determine when and how it is updated.

Matthew Wansley is the Climenko Fellow and Lecturer in Law, Harvard Law School.

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