SECTION THREE: REGULATION’S LIMITS AND REFORMS

ISSUES WITH RULES AND STATUTES

Even if an agency, legislature, or the common law promulgates a particular regulation, there may be problems with implementation: (1) information provision is an inexpensive solution but it may not reduce risk; (2) rules may create regulatory paradoxes; (3) cost-benefit analyses may not be required, and if they are, they have problems of their own.

1. Information Provision

   1. General Considerations – information provision is the most popular form of administrative regulation as well as market solution; yet there are practical problems with information dissemination as well as simply understanding what has been disseminated.

      1. Stephen Breyer, Regulation and Its Reform (1982) – 548

         1. Markets for information as a commodity may be skewed, but there are solutions.

            1. IP protection. Information is expensive to research but cheap to disseminate. Solution: protect dissemination with patent and copyright laws and regulate labels (e.g. require drug companies to label generic name for drug to show consumer competitor exists).

            2. Truthfulness regulation. Companies may lie. Solution: regulate truthfulness (e.g. with the SEC) or allow judicial remedies (e.g. rescind contracts).

            3. Rating systems. Consumers may not be able to evaluate quality. Solution: create a rating system, bar, prescribe information, etc.

      2. Susan Rose-Ackerman, Progressive Law and Economics and the New Administrative Law, 98 Yale L.J. 341 (1988) – 549

         1. Risk premiums. In Chicago model of risk reduction (pay workers more for riskier jobs), workers may not have adequate information regarding risk; firms may keep information secret.

         2. Problems with Market Solutions: (1) it may take a long time for workers to observe injuries; (2) workers may not actually observe injuries when they happen; (3) the level of hazard may depend on the interaction between the workplace and workers, e.g. may be bad for workers who smoke; (4) workplace conditions change with new technology.

         3. Problems with Provision Solutions: (1) workers may not be able to process percentages or data, and provision may be less effective than OSHA direct action; (2) collective action problems may lead workers and firms to misallocate value of safety, even with full information.

      3. Albert Nicholes & Richard Zeckhauser, “OSHA after a Decade: A Time for Reason,” from Case Studies in Regulation: Revolution and Reform (Leonard W. Weiss & Michael W. Klass eds., 1981) – 551

         1. Three levels of information problems. Problems arise in the information-provision process at three points: (1) when information is made available; (2) when it is transmitted to affected parties; and (3) when it is (mis)understood by the parties.

         2. Problems with risk premium. Workers can generally tell which industries are safer than others, but not whether metal stamp A or B is safer.

      4. W. Kip Viscusi, Risk by Choice: Regulating Health and Safety in the Workplace (1983) – 551

         1. Risk premiums and information. Workers generally understand health and safety risks across industries and have many sources of information, e.g. news, own injuries, coworkers, etc. Risk perceptions gained on the job have a powerful influence on workers’ intention to quit.

         2. Using information to avoid risk premiums. This means firms could reduce turnover costs in two ways: (1) by adopting technology whose risk is well-known ex ante, or (2) by incentivizing staying with low starting wages but highly increasing wages to eliminate quit-prone workers. The best solution is (3): using technology whose risk workers don’t know with option “(2)”, so workers can’t exercise risk-premium strategy.

      5. Howard Latin, Good Warnings, Bad Products, and Cognitive Limitations (1994)

         1. Final problem with risk premiums. Tension exists between explicit information provision and information workers and consumers gain from experience, leading to cognitive dissonance.

      6. Cass Sunstein, Speech to HLS (Mar. 26, 2012)

         1. Two systems in the human mind (System 1—automatic, intuitive, effortless and System 2—deliberative, calculative, statistical) explain the following heuristics:

            1. Defaults: people are more willing to accept default choices.

            2. Channel Factors: people are more willing to move away from defaults if they have specific directions.

            3. Salience: people are more likely to spot salient factors (System 1) then deal with lots of information (System 2).

            4. Complexity: people avoid complexity.

            5. Affect Heuristic: people use experiential background to make decisions (e.g. old baseball scouts in Moneyball).

            6. Availability Bias: people are more likely to make decisions based on the information available.

         2. By taking advantage of these heuristics and combining them with a systematic cost-benefit approach, agencies can save a tremendous amount of money while accomplishing more.

            1. “Plate not pyramid”: the nutrition pyramid did not make as much sense to people as a visual “plate” of serving portions; this will increase compliance.

            2. Comparison Friction: new fuel labels on cars says annual fuel costs and savings due to fuel costs rather than city v. highway MPG.

            3. Smart Disclosure: energy bills that tell consumers what is drawing most energy allows them to make better choices.

            4. Data.gov / Regulations.gov: these allow interested apps developers to create smart disclosure systems people will actually take advantage of, e.g. MBTA data and Nextbus.com.

   2. Generating Information Collectively – market and legislative approaches to information provision require companies or workers to offer information on their own; but there are structural reasons why these types of solutions do not always work.

      1. Peter Dorman, Markets and Mortality: Economics, Dangerous Work, and the Value of Human Life (1996) – 557

         1. Unions as information providers. are conflicted between safety and other demands, as well as between structural limits on risk-based advocacy. Options include:

            1. demanding contracts with specific risk-reduction policies (...

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