Do regulators overestimate the costs of regulation?
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R. David Simpson
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.
Acknowledgments
I thank Jennifer Bowen, Cynthia Morgan, Carl Pasurka, Ronald Shadbegian, Nathalie Simon, William Wheeler and Ann Wolverton for comments on related work, Winston Harrington for a helpful discussion, and Robert Hahn for comments on an earlier draft. Both the style and the substance of the paper have benefited from a number of helpful suggestions from two anonymous reviewers. I remain responsible for any errors.
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Article note
All opinions expressed here are the author’s and do not necessarily represent those of the United States Environmental Protection Agency.
©2014 by De Gruyter
Articles in the same Issue
- Frontmatter
- Retrospective cost analyses of EPA regulations: a case study approach
- Ex ante and ex post cost estimates of the Cluster Rule and MACT II Rule
- Retrospective evaluation of costs associated with methyl bromide critical use exemptions for open field strawberries in California
- National primary drinking water regulation for arsenic: A retrospective assessment of costs
- A retrospective assessment of the costs of EPA’s 1998 Locomotive Emission Standards
- Do regulators overestimate the costs of regulation?
Articles in the same Issue
- Frontmatter
- Retrospective cost analyses of EPA regulations: a case study approach
- Ex ante and ex post cost estimates of the Cluster Rule and MACT II Rule
- Retrospective evaluation of costs associated with methyl bromide critical use exemptions for open field strawberries in California
- National primary drinking water regulation for arsenic: A retrospective assessment of costs
- A retrospective assessment of the costs of EPA’s 1998 Locomotive Emission Standards
- Do regulators overestimate the costs of regulation?
