Substitution in Regulatory Agencies: FDA Enforcement Alternatives

Abstract:     
This paper develops a framework to understand the factors to which regulatory agencies respond and examines how these factors may influence agency decision-making. The model shows how either changing feedback from constituents or changing regulatory costs can alter the trade-offs facing the agency and hence create opportunities for substitution among different agency actions. This framework is used to explain the changing portfolio of FDA enforcement actions between 1972-1992. Results indicate that changing constituent and political feedback is the reason for the observed policy change. Specifically, budget reductions and increasing industry demand for product approval led the FDA to reduce monitoring and substitute less resource-intensive enforcement, namely recalls, for more resource-intensive enforcement. Results also show that increasing numbers of adverse drug reaction reports from consumers and physicians enabled the agency to increase the efficiency of its inspections policy and to ultimately reduce its use of inspections.

JEL Classification: K23, K32, L51

Accepted Paper Series