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Abstract:It has occasionally been asserted that regulators typically overestimate the costs of the regulations they impose. A number of arguments have been proposed for why this might be the case. The most widely credited is that regulators fail sufficiently to appreciate the effects of innovation in reducing regulatory compliance costs. Most existing studies have found that regulators are more likely to over- than to underestimate costs. While it is difficult to develop summary statistics to aggregate the results of different studies of disparate industries, one such measure is the average of the ratio of ex ante estimates of compliance costs to ex post estimates of the same costs. This ratio is generally greater than one. In this paper I argue that neither the greater frequency of overestimates nor the fact that the average ratio of ex ante to ex post cost estimates is greater than one necessarily demonstrates that ex ante estimates are biased. There are several reasons to suppose that the distribution of compliance costs could be skewed, so that the median of the distribution would lie below the mean. It is not surprising, then, that most estimates would prove to be too high. Moreover, Jensen's inequality implies that the expected ratio of ex ante to ex post compliance costs would be greater than one. I propose a regression-based test of the bias of ex ante compliance cost estimates, and cannot reject the hypothesis that estimates are unbiased. Failure to reject a hypothesis with limited and noisy data should not, of course, be interpreted as a strong argument to accept the hypothesis. Rather, this paper argues for the generation of more and better information. Despite the existence of a number of papers reporting ex ante and ex post compliance cost estimates, it is surprisingly difficult to get a large sample with which to make such comparisons.

This article examines the relationship between political veto points, credible commitments, and regulatory compliance costs. Its central purpose is to assess whether different types of political veto points credibly constrain regulatory change and thus lower compliance costs. The authors conceptualize veto points broadly, including legislative oversight, gubernatorial powers, and direct democracy. We analyze state-level environmental compliance costs from 1988 to 1994 as a function of the structure of state political institutions and state political and economic characteristics. The results suggest that a key veto point, the authority for legislators to review bureaucratic behavior, consistently reduces compliance costs.

Recent public debate on the costs and benefits of EU membership has focused more on the costs and less on the benefits. This paper explores the benefits from improved regulatory or policy implementation and enforcement. If actual regulatory enforcement differs from the socially optimal level, membership of a regional bloc that strengthens accountability mechanisms can improve the quality of implemented regulation. However, if the regional bloc tends to over-regulate, the overall increase in the regulatory burden, together with strengthened accountability, will move a country farther away from its socially optimal state. Membership of the EU is beneficial for countries with weak enforcement institutions, but it may worsen the welfare of countries with strong regulatory institutions. Infringement statistics indicate that no member state of the EU has a perfect record in implementation and enforcement.

Abstract
President Biden's first-day memo "Modernizing Regulatory Review" directs the Office of Management and Budget to "propose procedures that take into account the distributional consequences of regulations… to ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities." This paper makes two contributions. First, it discusses how economic analysis can transparently provide the information needed to make value-judgments about what distributional effects are appropriate and inappropriate. Second, it discusses the distributional consequences of regulations that are either designed to reduce internalities or might have the additional benefit of reducing internalities. Examples include tobacco product regulations, appliance energy efficiency standards, and automobile fuel efficiency standards. In many cases, the regulations will increase the prices or decrease the availability of goods that disadvantaged consumers prefer. This paper discussed how to determine whether restricting their consumption opportunities creates net benefits or net costs for disadvantaged consumers. Inframarginal consumers who do not change their consumption face higher opportunity costs but do not receive any benefits from reduced internalities. Empirical challenges include the need to quantify the fraction of inframarginal consumers and the size of the internalities.

Estimating the cost of regulation is difficult. Firms sometimes reveal costs indirectly, however, when they exploit loopholes to avoid regulation. We apply this insight to fuel economy standards for automobiles. These standards feature a loophole that gives automakers a bonus when they equip a vehicle with flexible-fuel capacity. Profit-maximizing automakers will equate the marginal cost of compliance using the loophole, which is observable, with the unobservable costs of strategies that genuinely improve fuel economy. Based on this insight, we estimate that tightening standards by one mile per gallon would have cost automakers just $9–$27 per vehicle in recent years. (JEL L51, L62, Q48)