Bounded institutions.

Author:Listokin, Yair
Position:Continuation of III. Bounded Versus Unbounded Structures in Action through Conclusion, with appendix and footnotes, p. 366-395
  1. Traditional Regulatory Oversight Versus Regulatory Budgeting

    The analytical framework just developed applies to the problem of controlling administrative agencies. Administrative agencies can be thought of as agents of a principal-perhaps Congress, the President, or the American people. Agencies evaluate a "population" of potential regulations. The principal cannot evaluate the entire population and therefore delegates the task to the agency. Each potential regulation has a "trait," which is the regulation's suitability for achieving the goal of the principal. (43)

    Bias presents a recurring concern in the analysis of administrative agencies. Agencies are often presumed to have interests that diverge from those of the principal. The agency may differ from the principal in its evaluation of potential regulations. Indeed, mitigating such conflicts is one of the central questions of administrative law and administrative law scholarship. This scholarship debates the efficacy of different mechanisms, such as cost-benefit analysis, judicial oversight, executive branch oversight, and public oversight (for example, the Freedom of Information Act), for reducing costs of errors. (44) Each method brings pluses and minuses, but all of the methods leave agencies unbounded. (45) No matter how strict the oversight, any proposed rule that survives the oversight process becomes a regulation. So long as the cost-benefit analysis proves that the regulation has positive net benefits, or the regulation follows the statute, or the regulation passes through appropriate executive or judicial oversight, the regulation may be issued. Because there is no hard ceiling or floor on regulations, agency regulations are promulgated in an unbounded institutional environment.

    The regulatory environment need not be unbounded. The number--or more plausibly the value (46)--of regulations could be constrained by statute. The much-discussed concept of a "regulatory budget" imposes limitations on the costs that may be imposed by agencies via regulation. A recent Organization for Economic Cooperation and Development (OECD) report described a regulatory budget as follows:

    The regulatory budget operates by close analogy to the traditional fiscal process. For example, each year (or at some longer interval), the government would establish an upper limit on the costs of its regulatory activities to the economy and would apportion this sum among the individual regulatory agencies. This would presumably involve a budget proposal developed by a regulatory oversight body in negotiation with regulatory agencies, approved by the executive branch of government, and submitted for legislative review, revision and passage. Once final budget appropriations were in force, each agency would be obliged to live within its regulatory budget for the time period in question. (47) A regulatory budget provides the bounded institutional counterpart to the conventional unbounded regulatory environment. (48) Although the concept of a regulatory budget is more than thirty years old, regulatory budgets are rarely implemented. (49) This section analyzes when to choose regulatory budgeting versus conventional regulatory oversight as a method for reducing agency errors and bias.

    The analysis in the previous two Parts offers several reasons to believe that bounded institutional structures such as regulatory budgeting may prove superior to traditional unbounded oversight methods. Bounded structures are particularly attractive when agent bias and error are more pervasive, when there are no accurate rules to restrict agent discretion, when the cost of agent errors is nonlinear, and when the sample population assessed by an agent is large. These features describe many regulatory environments. At the same time, other features of the regulatory environment, such as the principal's probable ignorance of the population distribution of regulations and the difficulty of quantifying a regulatory budget, counsel against universal application of a bounded institutional structure. Instead of an all-or-nothing approach to regulatory budgeting, wherein a regulatory budget is either applied to all agencies or none, the analysis provided here suggests that a regulatory budget may be appropriate for some agencies but not others. Alternatively, it may be appropriate for the head of an agency to impose a regulatory budget on a sub-agency but inappropriate for Congress to impose one on an entire agency.

    1. EPA Regulations: The Case for Bounded Institutions

      To be concrete, consider a possible environmental regulation issued by the EPA. When promulgating environmental regulations, the EPA serves as an agent of Congress and the President under a variety of statutes, including the Clean Air Act. Many have accused the EPA of having a pro-environmental, anti-business bias. Oversight mechanisms, such as cost-benefit analysis, executive oversight via the Office of Information and Regulatory Affairs (OIRA), and judicial review, focus heavily on the EPA's regulations. The EPA has authority to consider a wide range of regulations, from clean water standards (50) to greenhouse gas emissions. (51) In addition, crafting environmental regulations is hard to specify by rule. Indeed, many environmental statutes specify vague standards for the EPA to follow. (52)

      Suppose that the EPA--pursuant to its authority under the Clean Air Act-- is considering a set of regulations to remove air pollutants. (53) Further suppose that the EPA is biased: it places a value on clean air that is double the value that Congress would place on clean air. In addition, Congress lacks the ability to specify by rule the regulations that it views as desirable. Finally, suppose that Congress has a sense of the amount of GDP it is willing to spend on clean air and specifies this number in a regulatory budget. (54)

      Under these conditions, a regulatory budget outperforms conventional regulatory oversight mechanisms. The budget compels the EPA to regulate according to Congress's preferred amount. But even if the EPA is constrained in the costs of regulations it can promulgate ("how much regulation"), how do we know that the agency will choose the right regulations ("which regulations")? The EPA chooses the right regulations because it values clean air twice as much as Congress does. It will try to maximize the value of clean air, and achieving this objective requires the EPA to choose the regulations that provide the cleanest air possible subject to the budget constraint imposed by Congress. These are the same regulations that Congress would choose. Because Congress has specified its clean air "budget," the fact that the EPA values clean air more than does Congress imposes no costs. (55)

      Conventional oversight mechanisms, by contrast, fail to guarantee that the EPA's bias in favor of clean air will produce the right regulations. Judicial oversight means that the EPA will choose the regulations that are easiest to justify under the relevant oversight standard. Choosing regulations in this manner leads to over-regulation because of the EPA's bias. In addition, the EPA's regulations may not produce the cleanest air per unit cost. Instead of seeking the most efficient regulations, the EPA seeks the regulations that are most likely to pass judicial muster.

      A similar story applies to executive oversight. The EPA will attempt to implement its clean air bias by choosing regulations that appeal to its executive overseers at OIRA or other relevant centers of oversight within the White House. As with judicial oversight, these regulations will likely be greater in quantity and less efficient than the regulations that would be chosen under a regulatory budget.

      Among the traditional unbounded oversight mechanisms, cost-benefit analysis (CBA) provides the closest analogue to a regulatory budget. CBA requires agencies to quantify the benefits and the costs of each regulation, and regulations are warranted if benefits exceed costs. Cost estimation is therefore required of both regulatory budgeting and cost-benefit analysis. CBA differs from regulatory budgeting in asking for quantification of regulatory benefits.

      CBA's quantification of benefits yields advantages and disadvantages. On the plus side, accurate calculation of costs and benefits produces optimal regulation. Congress wants regulations for which benefits exceed costs, and accurate CBA realizes this aim. The bounded structure of regulatory budgeting, by contrast, introduces rigidity that is costly if agents accurately estimate costs. An agency subject to a regulatory budget may forego positive value CBA projects or undertake negative value CBA projects.

      CBA's disadvantages arise when the agent has a biased view of the benefits of a regulation. In our hypothetical, cost-benefit analysis produces too much regulation because the EPA values clean air (the benefits of regulation) more than Congress does. Using CBA, the EPA will choose the right regulations-- the ones that produce the cleanest air per dollar--but there will be too much regulation because the EPA values clean air more than Congress does. If OIRA or some other oversight body can "correct" the EPA's overvaluation, then CBA can produce the right amount and types of regulations, but this requires the oversight body to monitor effectively the EPA's estimates of both costs and benefits.

      By bounding the cost of regulations, by contrast, regulatory budgeting does not demand that Congress or any other oversight body obtain good information about the value of clean air. So long as the EPA shares Congress's rank ordering of benefits of clean air, and the costs of the EPA's regulations are quantifiable, the bounded regulatory budget produces an efficient outcome-- though, as indicated in the next section, this does not hold true when some assumptions are relaxed.

    2. EPA Regulations: The Case Against Bounded Institutions

      The previous section told...

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