The Positive Political Theory of Cost-Benefit Analysis: A Comment on Johnston
Posted: 13 Jun 2002
This is a Commentary on Jason Johnston's important article, "A Game Theoretic Analysis of Alternative Institutions for Regulatory Cost-Benefit Analysis." Eric Posner and I have argued in prior work that cost-benefit analysis (CBA) should be understood as a welfarist decision procedure. Our claims are that: (1) CBA and its close cousin, Kaldor-Hicks efficiency, lack intrinsic moral significance but (2) CBA, in many regulatory contexts, is a decisional tool the use of which maximizes overall well-being, relative to other decisional tools. The latter is a contingent and empirical claim, subject to formal modeling and empirical testing. Johnston's article provides a formal model of CBA which illuminates its welfare effects and, in particular, shows that a statutory CBA requirement can reduce welfare, as compared to a "benefits" statute that permits a regulatory agency to pursue some regulatory benefit, such as environmental purity, and ignore costs. Interestingly, Johnston shows that in principle a statutory CBA requirement can be welfare-reducing even if the process of CBA is costless, regulatory agencies do not make mistakes in the application of CBA, agencies do not shirk with respect to the statutory benefit, agencies are generally well-informed about regulatory costs and benefits, and "wealth effects" are not present. Given lobbying and litigation activities by firms, plus epistemically imperfect courts, a benefits regime can induce the agency to "sort" between directives against low- and high-cost firms; and the shift to a CBA regime can shift the regulatory equilibrium to one where the agency issues or fails to issue directives against both types of firms. This Commentary analyzes and to some extent criticizes Johnston's model and suggests future directions for modeling and testing the welfare effects of CBA.
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