Discover more from Third Order

Good regulatory management paves the path to abundance. I examine problems and solutions in the reg process. 1st order effects = intended consequences. 2nd order = predictable unintended consequences. 3rd order = unpredictable unintended consequences.

The Puzzle of the Regulatory Process

The REINS Act is just one piece

Patrick McLaughlin

Aug 31, 2023

Regulations, and the hundreds of regulatory agencies that create them, are starting to reappear on the political radar. In June, the House passed the REINS Act (again) and presidential candidates are looking at ways to reverse the growth of the regulatory state.

The REINS Act itself has its merits, as I wrote here. But it would only be one piece of the regulatory reform puzzle. At risk of over-simplifying, it’s helpful to think about the regulatory process as containing four key elements: ex ante assessment, stakeholder engagement, cost-benefit analysis and ex post evaluation.

Ex ante assessment requires answering two questions: Is there really a problem that needs to be fixed by regulatory action and, if so, what is the best way to do so? Formally identifying the problem that the regulation is intended to address and determining whether regulation is the appropriate solution goes a long way towards creating successful regulatory outcomes. This step involves exploring different alternatives that might reduce or eliminate the problem and thinking about their potential costs and benefits, as well as the likelihood of successful implementation. This includes, but is not limited to regulations.

Stakeholder engagement involves soliciting input from affected parties, including industry representatives, consumer groups and other interested parties. This step is important for ensuring that the regulation is well-informed and considers the perspectives of all relevant stakeholders.

Cost-benefit analysis involves quantifying the costs and benefits of the regulation and comparing them to determine whether the regulation is likely to be effective and efficient. This step is important for ensuring that the regulation is well-designed and that the benefits outweigh the costs.

Ex post evaluation involves monitoring the regulation after it has been implemented to determine whether it is achieving its intended goals and if any unintended consequences have arisen. This step is important to ensure that the regulation is effective and so that any necessary adjustments can be made.

Ideally, the regulatory process would promote effective and efficient regulation by aligning the incentives of regulators with the desires of the legislature and the well-being of the public. The design of these four elements of the regulatory process sets the stage for success or failure. In other words, the outcome of the regulatory process is a function of the design of the regulatory process. Unless each of these four elements is designed in a way that aligns regulators’ incentives with the incentives of Congress and the public interest, you’re likely to get something else.

So what challenges can arise in the regulatory process? These include principal-agent issues, monopoly provision, information asymmetry and regulatory accumulation. In future posts, I’ll explore these concepts, how they relate to the regulatory process and how to avoid them.