For all of us working towards providing a better business and regulatory environment, it is important to know whether economic analysis has improved the quality of regulatory decisions. A proper analysis of the costs and benefits associated with regulations (government rules that govern private activity) is critical in determining which regulations to administer and in what capacity. However, quantifying the effectiveness of a regulatory environment (e.g., Doing Business, Enterprise Surveys) is only half the job; an analysis is only truly successful when it shows us the impact of the given regulation on the affected business environment.
A recent paper by Hahn and Tetlock (2008) in the Journal of Economic Perspectives attempts to provide some preliminary evidence on whether formal economic analysis has in fact improved regulatory decisions. The study focuses on relatively richer countries (USA and Western Europe) where economic analysis is likely to play more of an important role in regulatory decisions (than in developing countries). However, even in these richer countries, the study finds that the quality of government analyses falls far short of basic standards of economic research, and that the quality of these analyses has not been improving over time. For example, the aforementioned study states that the Airport Noise and Capacity Act of 1990 was designed without proper analysis of the costs and benefits involved. As later research showed, the estimated benefit from the Act was USD 5 billion, yet the cost was much higher (about USD 10 billion).
The study also shows that we do not even have answers to the most basic question. Do benefit–cost analyses tend to overstate benefits (perhaps out of regulatory zeal)? Or, conversely, do benefit-cost analyses overstate costs (perhaps because they fail to recognize how innovation will reduce the costs after regulations are imposed)? Furthermore, there is little evidence that economic analysis of regulatory decisions has resulted in more efficient regulation. This is not to say that economic analyses have not had an impact in important areas (such as the deregulation of airlines), but unfortunately, such these cases are exceptions.
What can we do to improve the situation? The study suggests that social scientists can contribute to the economic analysis of regulatory decision-making in several ways. First, scholars could help identify the conditions under which particular forms of analysis, and particular expenditures on economic analysis, might yield more efficient policies. For example, cost-effectiveness analysis may be most useful in eliminating the most inefficient projects, such as a wasteful chronic toxin regulation. Second, researchers could participate in the development of analytical tools to improve an evaluation. And lastly, researchers could assist in developing and improving the data sets that are used as inputs for statistical models. The data sets are crucial for informing regulatory decisions via economic analysis, such as government inventories on private expenditures on pollution control.