‘Best Practice’ Standards for Regulatory Benefit–Cost Analysis

DOIhttps://doi.org/10.1016/S0193-5895(07)23001-5
Pages1-47
Published date16 October 2007
Date16 October 2007
AuthorDaniel H. Cole
‘BEST PRACTICE’ STANDARDS FOR
REGULATORY BENEFIT–COST
ANALYSIS
Daniel H. Cole
ABSTRACT
Government agencies have endeavored,with limited success, to improve the
methodological consistency of regulatory benefit–cost analysis (BCA).
This paper recommends that an independent cohort of economists, policy
analysts and legal scholars take on that task. Independently established
‘‘best practices’’ would have four positive effects: (1) they would render
BCAs more regular in form and format and, thus, more readily assessable
and replicable by social scientists; (2) improved consistency might
marginally reduce political opposition to BCA as a policy tool; (3)
politically-motivated, inter-agency methodological disputes might be
avoided; and (4) an independent set of ‘‘best practices’’ would provide a
sound, independent basis for judicial review of agency BCAs.
1. INTRODUCTION
Benefit–cost analysis (BCA)
1
is an inherently controversial practice,
especially in the realm of regulatory policy. Like the Kaldor–Hicks (K-H)
efficiency criteria upon which it is based, regulatory BCA yields results that
Research in Law and Economics, Volume 23, 1–47
Copyright r2007 by Elsevier Ltd.
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ISSN: 0193-5895/doi:10.1016/S0193-5895(07)23001-5
1
are, at best, ambiguous with respect to social welfare and, at worst, subject
to manipulation for political ends. As a consequence, the results of all BCAs
are contestable.
Unfortunately, no practical alternative exists for predicting and measuring
the social-welfare outcomes of regulatory policies. In theory, the Pareto
criterion yields unambiguous results, but it is ruled outin practice by its strict
requirement of voluntary consent of all affected parties, which presumes
actual compensation of losers at their subjective valuations of their losses.
These strict conditions are met only by the negligibly small and uninteresting
set of voluntary market exchanges with no significant negative externalities.
In the realm of regulatory policy, resource allocations never are based on the
unanimous consent of all affected parties; and the losers from regulatory
policies never are compensated for losses based on their subjective
valuations. So, the strict Pareto conditions cannot be met. Consequently,
society is left with the ambiguous outcomes of imperfect and manipulable
BCAs based on the K-H criteria (or marginally improved versions of K-H
offered, for example, by Zerbe, 2001).
2
The ambiguities and manipulability that render BCA generally contro-
versial are exacerbated in the realm of regulatory policy by: long time
horizons and uncertain social discount rates; the absence of primary or
secondary markets for many environmental goods, which makes any prices
assigned to them inherently contestable; and the virtual impossibility of
assigning universally acceptable values to human lives. For these reasons,
critics such as Ackerman and Heinzerling (2004) rejectBCA entirely as a tool
of regulatory policy making.
3
Even if regulatory BCA never can be rendered completely uncontroversial,
it can be made substantially less controversial than it is now simply by
improving its methodological consistency. Even an admittedly imperfect
methodology, applied consistently in accordance with standard criteria
widely accepted among scholars and practitioners, should be less objection-
able than various, inconsistently applied methodologies.
This paper will demonstrate that the methodological consistency of
regulatory BCA has been improving, though more in theory than in practice,
over the last decade or so, and provide a few discrete suggestions for
additional improvements. The ultimate goal – though not the goal of this
particular paper – is to standardize a set of ‘‘best practices’’ for regulatory
BCA. That goal, unfortunately, is unlikely to be achieved by the primary
users of BCAs – the regulatory agencies themselves – because those agencies
are subject to divergent political pressures that inevitably would raise
questions about the motives behind any set of standards they might establish
DANIEL H. COLE2
and attempt to enforce. For reasons explained in Section 2, a set of ‘‘best
practices’’ established by the Environmental Protection Agency (EPA)
almost certainly would differ in important respects from a set of ‘‘best
practices’’ established by the President’s Office of Management and Budget
(OMB). The differential political biases of different agencies with different
missions would likely undermine the benefits to be gained from adopting a
set of ‘‘best practices.’’ Indeed, the EPA (2000) and OMB (2003) both have
recently published ‘‘best practice’’ guidelines, which diverge in important
respects. Multiple sets of ‘‘best practices’’ are better than none only to the
extent that multiple sets of ‘‘best practice’’standards might provide a starting
point for conciliation and consolidation of a single set of standards.
This paper recommends that an independent and heterodox cohort of
economists, legal scholars, policy analysts, and decision theorists be
appointed under auspices of an independent organization such as the
National Academy of Sciences, American Economics Association, or a newly
minted ‘‘Society for Benefit–Cost Analysis,’’ to derive a set of ‘‘best
practices’’ for regulatory BCA. The hope is not that such a group would be
able to derive completely objective and neutral standards for BCA; that
would a pipe dream. BCA contains too many subjective elements, including
social discount rates and valuations of non-market goods and services, ever
to be completely objective and neutral. However, an independent cohort of
experts is less likely to be swayed by the immediate political concerns that
motivate the agencies that produce and utilize BCA. Independent
economists, legal scholars and policy analysts presumably would have less
of a political stake than OMB or EPA officials, for example, in the selection
of a rate (or range of rates) for discounting future costs and benefits or
pricing various mortality and morbidity effects.
Assuming a cohort of experts could establish a legitimate and useful set of
‘‘best practices’’ for BCA,
4
their product would not constitute a legal
standard directly applicable to government agencies but a social–scientific
standard or norm that agencies might choose to adopt and reviewing courts
might choose to recognize. If some government agency based a policy
decision on a BCA that did not conform to the ‘‘best practices,’’ without a
satisfactory excuse or explanation, a reviewing court might reject the BCA
and possibly the substantive policy it supported.
In sum, the adoption of methodological ‘‘best practices’’ for regulatory
BCA could have four positive effects: (1) it would render BCAs more regular
in form and format and, thus, more readily assessable and replicable by
social scientists; (2) it presumably would reduce, at the margins, political
opposition to BCA as a policy tool; (3) it might reduce (though not
‘Best Practice’ Standards for Regulatory Benefit–Cost Analysis 3

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