Regulatory Robustness

Abstract

The modern regulatory state is the product of the Progressive Era and the progressive ideology that social and economic problems are subject to “solutions.” Social problems can be best addressed by selecting well-qualified individuals insulated from distorting political and economic incentives and arming them with the information needed to devise these solutions. This can be characterized as an “optimization” approach to regulation as regulators believe it their task to solve pressing social problems.

Yet the quality of the decisions that these individuals make is subject to the limits of information and benevolence they have toward pursuing the public interest instead of their own private interests and those of interest groups as well as their ability to admit their own errors and adapt. This gives rise to the concept of regulatory “robustness,” namely the robustness of regulation to three potential distortions: (1) limited knowledge, (2) limited benevolence, and (3) adaptability and feedback. Taking into account these factors, it becomes evident that the solutions advocated in a world of regulatory optimization are not those that would be recommended in the world of regulatory robustness. Aiming for regulatory optimization in the face of limited knowledge, benevolence, and adaptability can result in suboptimal and even catastrophic results.

Keywords: Progressive Era, regulation, regulatory optimization, rule of law, regulatory policy, administrative state, competitive federalism

JEL Classification: K2, K20, K23