Do Regulators Overestimate the Costs of Regulation?

David Simpson

No 201107, NCEE Working Paper Series from National Center for Environmental Economics, U.S. Environmental Protection Agency

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.

Keywords: benefit-cost analysis; cost estimation; ex ante; ex post; innovation; iterated expectations (search for similar items in EconPapers)
JEL-codes: L51 Q52 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2011-12, Revised 2011-12
New Economics Papers: this item is included in nep-cba and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.epa.gov/environmental-economics/workin ... ate-costs-regulation First version, 2011 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nev:wpaper:wp201107

Access Statistics for this paper

More papers in NCEE Working Paper Series from National Center for Environmental Economics, U.S. Environmental Protection Agency Contact information at EDIRC.
Bibliographic data for series maintained by Cynthia Morgan (morgan.cynthia@epa.gov).