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Do regulators overestimate the costs of regulation?

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  • Simpson, R. David

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.

Suggested Citation

  • Simpson, R. David, 2014. "Do regulators overestimate the costs of regulation?," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 5(2), pages 315-332, June.
  • Handle: RePEc:cup:jbcoan:v:5:y:2014:i:02:p:315-332_00
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    Cited by:

    1. Antoine Dechezleprêtre & Misato Sato, 2017. "The Impacts of Environmental Regulations on Competitiveness," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(2), pages 183-206.
    2. Siedschlag, Iulia & Meneto, Stefano, 2020. "Green innovations and export performance," Papers WP674, Economic and Social Research Institute (ESRI).
    3. Kim, Jungwook & Chae, Subok, 2017. "Economic Effects of Regulatory Reform in Korea," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 39(4), pages 51-68.
    4. Fraas, Arthur G. & Kopits, Elizabeth & Wolverton, Ann, 2021. "A Retrospective Review of Retrospective Cost Analyses," RFF Working Paper Series 21-29, Resources for the Future.

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