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Do Regulators Overestimate the Costs of Regulation?

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  • 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, 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.

Suggested Citation

  • David Simpson, 2011. "Do Regulators Overestimate the Costs of Regulation?," NCEE Working Paper Series 201107, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Dec 2011.
  • Handle: RePEc:nev:wpaper:wp201107
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    File URL: https://www.epa.gov/environmental-economics/working-paper-do-regulators-overestimate-costs-regulation
    File Function: First version, 2011
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    References listed on IDEAS

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    1. repec:reg:ranaly:344 is not listed on IDEAS
    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. 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.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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