The John M. Olin Center

Paper Abstract

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86. Vartan Shadarevian & Robert Delaney, Multiple-Rule Cost-Benefit Analysis, 06/2019.

Abstract: Federal agencies must conduct regulatory analysis on potential rules in order to make sure that they work for the benefit of the public. When doing this, agencies conduct cost-benefit analysis (CBA) on that rule individually. This ‘piecemeal’ approach essentially evaluates the benefits and costs of a rule while holding the regulatory environment otherwise fixed. But the regulatory environment is not otherwise fixed. Rules can have ‘complementary’ effects, whereby one rule can increase the effectiveness of another rule. They can also have ‘substitute’ effects, whereby one rule can decrease the effectiveness of another rule. Large numbers of rules can also display macro-interdependencies. In a world where agencies pass large numbers of rules, interdependencies between rule effects confound the validity of individual CBA estimates that consider rules one-at-a-time. In such situations, current CBA practices lead to improper rule promulgation and review. While agencies have begun to consider interdependencies between rules, this analysis remains at a nascent stage and does not fully account for the issues newly identified in this paper. Nonetheless, the consideration of how to prudently incorporate rule interdependencies into multiple-rule analysis presents theoretical difficulties. After exploring the authority behind cost-benefit analysis, this paper then explains the interdependency problem whereby rules interact and thereby change their net-benefits. This paper then provides support for a multiple-rule approach and provides principles and tools that an agency can use when implementing, removing, updating, or replacing a rule.