Behavioral economics: implications for regulatory behavior

Behavioral economics (BE) examines the implications for decision-making when actors suffer from biases documented in the psychological literature. This article considers how such biases affect regulatory decisions. The article posits a simple model of a regulator who serves as an agent to a politica...

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Bibliographic Details
Published in:Journal of regulatory economics 2012-02, Vol.41 (1), p.41-58
Main Authors: Cooper, James C., Kovacic, William E.
Format: Article
Language:English
Subjects:
Administrative law
Anti-trust legislation
Antitrust
Behavior
Behavioral decision theory
Behavioral economics
Behavioural economics
Bias
Competition
Competition policy
Consumer protection
Consumers
Decision making
Economic theory
Economics
Economics and Finance
Gasoline prices
Heuristic
Industrial Organization
Intervention
Microeconomics
Original Article
Politics
Preferences
Public choice
Public Finance
Rationality
Regulation
Regulatory policy
Studies
Wage & price controls
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Summary:Behavioral economics (BE) examines the implications for decision-making when actors suffer from biases documented in the psychological literature. This article considers how such biases affect regulatory decisions. The article posits a simple model of a regulator who serves as an agent to a political overseer. The regulator chooses a policy that accounts for the rewards she receives from the political overseer—whose optimal policy is assumed to maximize short-run outputs that garner political support, rather than long-term welfare outcomes—and the weight the regulator puts on the optimal long run policy. Flawed heuristics and myopia are likely to lead regulators to adopt policies closer to the preferences of political overseers than they would otherwise. The incentive structure for regulators is likely to reward those who adopt politically expedient policies, either intentionally (due to a desire to please the political overseer) or accidentally (due to bounded rationality). The article urges that careful thought be given to calls for greater state intervention, especially when those calls seek to correct firm biases. The article proposes measures that focus rewards to regulators on outcomes rather than outputs as a way to help ameliorate regulatory biases.
ISSN:0922-680X
1573-0468
DOI:10.1007/s11149-011-9180-1