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Do Regulators Overestimate the Costs of Regulation?

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  • David Simpson
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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, with the most widely credited one being 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. Moreover, the ratio of ex ante estimates of compliance costs to ex post estimates of the same costs is generally greater than one. In this paper I argue that neither piece of evidence necessarily demonstrates that ex ante estimates are biased. There are several reasons to suppose that the distribution of compliance costs would 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, we would expect from a simple application of Jensen’s inequality that the expected ratio of ex ante to ex post compliance costs would be greater than one. In this paper I propose a regression-based test of the bias of ex ante compliance cost estimates, and cannot reject the hypothesis that estimates are unbiased. 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 of such comparisons. My most salient finding does not concern the bias of ex ante cost estimates so much as their inaccuracy and the continuing paucity of careful studies.

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    File URL: http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2011-07/$File/2011-07.PDF
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    Bibliographic Info

    Paper provided by National Center for Environmental Economics, U.S. Environmental Protection Agency in its series NCEE Working Paper Series with number 201107.

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    Length: 20 pages
    Date of creation: Dec 2011
    Date of revision: Dec 2011
    Handle: RePEc:nev:wpaper:wp201107

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    Related research

    Keywords: benefit-cost analysis; cost estimation; ex ante; ex post; innovation; iterated expectations;

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    References

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    1. Dale, Larry & Antinori, Camille & McNeil, Michael & McMahon, James E. & Sydny Fujita, K., 2009. "Retrospective evaluation of appliance price trends," Energy Policy, Elsevier, vol. 37(2), pages 597-605, February.
    2. Morgenstern, Richard & Harrington, Winston & Nelson, Per-Kristian, 1999. "On the Accuracy of Regulatory Cost Estimates," Discussion Papers dp-99-18, Resources For the Future.
    3. repec:reg:wpaper:344 is not listed on IDEAS
    4. repec:reg:ranaly:344 is not listed on IDEAS
    5. Winston Harrington & Richard D. Morgenstern & Peter Nelson, 2000. "On the accuracy of regulatory cost estimates," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(2), pages 297-322.
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