54 Pages Posted: 1 Feb 2013 Last revised: 14 May 2013
Date Written: January 31, 2013
When forming policy under conditions of extreme uncertainty, the optimal approach seems to be a process by which the policy decision is divided into multiple stages, or in other words, an experimental approach. The optimal legal vehicle for such policy experimentation is what I call “experimental rules,” which are rules that terminate automatically and are designed for the express purpose of generating data during the sunset period that can then be used to determine the optimal policy strategy for the long run. Such rules are at their most effective when they are adopted by federal agencies, since “arbitrary and capricious” review is likely to compel regulators to take into account learning generated by the experiment, thereby overcoming one of the principal obstacles to policy experimentation.
Yet, it turns out that agencies rarely adopt such “experimental rules” in the real world. Indeed, I find that over the past ten years, many agencies, including the Securities and Exchange Commission (“SEC”), adopted experimental rules less than 1% of the time. The reason, I argue, has to do with the political economy, which appears to disfavor experimental rules either because they are more temporary and therefore less valuable to interest groups or because they are more costly to adopt. However, we could overcome these political economy constraints and encourage policy experimentation by having courts apply greater deference to experimental rules (at least during the initial, experimental phase of the multi-stage process). This approach would have the effect of nudging actors in the political economy toward experimental rules, thereby avoiding the possibility of sub-optimal policies becoming entrenched in permanent rules. It would also preserve rules that might otherwise be vacated by courts at least long enough to generate the necessary learning to determine whether they should be implemented on a more permanent basis.
As an illustration of this argument, I use the recent case of Business Roundtable v. SEC, where the D.C. Circuit vacated the SEC's controversial proxy access rule that would have given certain significant shareholders of public companies the right to include their own board nominees on the corporation's ballot. My analysis suggests that, given the uncertainty surrounding the costs and benefits of proxy access, the SEC should have adopted this rule as an experimental rule but that they most likely didn't because of political economy factors. The deference principle that I propose would have encouraged the SEC to adopt proxy access on an experimental basis, but it also would have prevented the D.C. Circuit from vacating the experimental rule, if at all, until after the experiment had generated sufficient data to determine whether proxy access is a desirable policy that should be adopted on a permanent basis.
Keywords: public choice, economics of regulation, political economy, experimental, administrative law, judicial review, securities regulation, proxy access, SEC, Business Roundtable, D.C. Circuit
JEL Classification: G34, G38, H77, K2, K22, K23, L51
Suggested Citation: Suggested Citation