Financial Regulation and Cost-Benefit Analysis: A Comment

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Financial Regulation and Cost-Benefit Analysis: A Comment

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Title: Financial Regulation and Cost-Benefit Analysis: A Comment
Author: Sunstein, Cass Robert
Citation: Cass R. Sunstein, Financial Regulation and Cost-Benefit Analysis: A Comment (Olin Center Faculty Discussion Paper 785, Harvard Public Law Working Paper No. 14-17, 2014).
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Abstract: Many regulators have concluded that cost-benefit analysis is the best available method for capturing the welfare effects of regulations. It is therefore understandable that in recent years, some people have been interested in requiring financial regulators to engage in careful cost-benefit analysis of their regulations, and to proceed only if the benefits justify the costs. Ideas of this sort have played a significant role in judicial review of agency action, especially in cases involving the Securities and Exchange Commission. But it is important to distinguish the question whether courts should require cost-benefit analyses, and review them for arbitrariness, from the separate question whether financial regulators should produce such analyses. It is also important to understand that in some cases, cost-benefit analysis presents serious challenges for financial regulators. When agencies lack relevant information, and cannot project benefits (or costs), they can invoke established techniques to discipline the question whether and how to proceed. In particular, breakeven analysis plays a valuable role. Of course it remains possible that in rare cases, agencies have so little information that they cannot even use breakeven analysis. In such cases, it is not helpful to refer to the precautionary principle or to “expert judgment.” In such rare cases, the best that agencies may be able to do is to rely on some version of maximin, while also seeking to fill informational gaps over time.
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