A few years back I came across a law article entitled “Bargaining Theory and Regulatory Reform: The Political Logic of Inefficient Regulation” written by American lawyers David B. Spence and Lekha Gopalakrishnan.
I wish to share hereinbelow the salient parts of the said article for legal research purposes of the visitors of this blog, considering the significance thereof in relation to current issues and developments on regulatory reform (e.g., “negotiated rulemaking”, “collaborative regulation”, “collaborative bargaining”) as an adjunct of legal philosophy. Thus:
1. Why is regulation inefficient, and why do regulators forgo obvious opportunities to make it more efficient? This is a familiar lament, one that is heard beyond the confines of academic discourse.
2. Economists have long argued that statutes frequently require less-than-sensible approaches to policy problems. This economic critique of regulation has been particularly unrelenting in the field of environmental regulation, where economists have criticized the barriers to efficient pollution control posed by environmental statutes and regulations.
3. As an introduction, most regulatory law is the product of political processes. There are two varieties of inefficiency in regulation—substantive inefficiency and procedural inefficiency. Pareto optimality applies. The article argues that all available positive-sum changes from the status quo will be achieved through bargaining. It hypothesize that group with political veto power perceives an essentially positive-sum proposal in zero-sum terms. Stakeholders exercise their veto power rationally, not only because they suspect that proposed reforms would harm their interests, but also because this approach maximizes their ability to extract further concessions from their adversaries in the future.
4. “Regulatory reform” is not a new idea. There has been a groundswell of opposition to regulation as an impediment to economic growth, and a general trend toward increasingly centralized White House review of regulations.
5. The distinction between regulatory relief and regulatory reform is a distinction between ends and means—between simply reducing the regulatory burden on industry by lowering standards, and addressing the question of how best to achieve a given standard.
6. The substantive efficiency critique of regulation is long-standing and well-known, as is the economist’s solution for inefficiency: namely, the replacement of regulatory mandates with market incentives. It says that regulation should be minimally prescriptive, leaving to regulated firms the task of determining the means of compliance with regulatory limits and goals.
7. That preference for cost-efficiency has led to sustained criticism of so-called “command and control” environmental regulation, under which (i) all regulated firms must meet uniform, technology-based pollution control standards, and (ii) regulators often specify not only the firm’s pollution control goal, but the means of achieving it as well. That is, by specifying how individual firms must contribute to pollution control goals, we make pollution control unnecessarily costly. This is because command and control regulation ignores opportunities for two distinct benefits—gains from technological innovation and gains from trade.
8. Scholars from a variety of disciplines have identified some of the drawbacks and unintended consequences of rulemaking as a policymaking device. One group of critics argues that overuse of rulemaking has slowed agency decision-making and has multiplied interest group opportunities to challenge agency decisions in court, causing an explosion of administrative litigation and a consequent reordering of administrative priorities. This, in turn, has made agencies gun-shy and has produced an “ossified” agency decision making process that is less flexible, less rational, and less effective.
9. Another group of critics argues that rulemaking necessarily begets certain varieties of substantive inefficiencies because the task of writing an “optimally specific” rule is difficult, if not impossible. Most of the time, one size does not fit all. For that reason, crafting a rule that simultaneously provides meaningful guidance to private sector actors and accommodates the myriad circumstances it will encounter over the course of its lifetime is a Herculean task, one that most rule writers fail. The attempt to accommodate specific situations (either at the drafting stage or in subsequent revisions) can make rules complicated and unwieldy. It is this kind of problem that has led some scholars to propose that agencies rely minimally on rules and instead make rules on a case-by-case basis, the way common law “rules” emerge from a body of case law. Others recommend ways to make rules more adaptable and accommodating, such as writing less specific rules, authorizing waivers, and the like.
10. It is a fundamental axiom of neoclassical microeconomics that, under certain conditions, a Pareto optimal distribution should be achieved through bargaining.
11. In theory, negotiated rulemaking is designed to bring stakeholders into the regulation development process earlier, to promote the sharing of information and perspectives among stakeholders and the Agency, and thereby to produce better and less controversial rules.
12. Some regulatory reforms do run up against statutory and other legal constraints and those constraints certainly do reflect policy values other than cost-effectiveness and flexibility.
13. There is a general suspicion that reform in the name of efficiency may bring laxity. Thus, critics of reform argue, statutory admonitions compelling inefficient regulation reflect, at least in part, a social choice in favor of giving priority to these other goals, even at the cost of substantive inefficiency.
14. Critics of reform also challenge reformers’ concern with, and prescription for, procedural inefficiencies. The critics’ argument tracks closely the original justification for using rules, and reflects a continuing concern with the problem of regulatory capture. That concern, in turn, stems from a deep suspicion of the motives and trustworthiness of business participants in collaborative policy processes.
15. The specter of regulatory capture also hangs over the second general argument raised against reform: namely, the argument that collaborative policy processes represent a de facto cession of EPA decision making authority to private parties. First, reform initiatives that are designed to promote collaboration and cooperation between private stakeholders assume an interest group bargaining model of the policy process. In so doing, the initiatives ignore the notion of a “public interest” apart from the collision of private interests. Perhaps the most vigorous proponent of this view is William Funk, who sees some collaboration-based reforms as “perversions” of the public interest. He argues that the primary purpose of administrative law is to promote the rule of law, and that agencies’ actions are justified and legitimized by their faithfulness to statutory directives. This view contends that group consensus is a poor substitute for statutory authority as the basis for legitimacy.
16. In the context of regulatory reform, environmental interests may veto proposed positive-sum changes in the status quo (such as reductions in the cost of compliance coupled with modest pollution reductions) based on the belief that industry has not done enough to control pollution, or that polluting behavior is morally wrong. That is, environmentalists may view the status quo as both inadequate and, in a sense, illegitimate. They may view the status quo as a steppingstone to a more stringent future policy. This view is evident in the rich history of citizen suit litigation brought by environmental groups to force the EPA to tighten environmental standards. It is also why environmental laws are sometimes called “aspirational.” Not only do they set extraordinarily ambitious goals, but the major pollution control statutes also are designed to move policy toward those goals by producing ever more stringent pollution control limits in self-executing ways. Similarly, the long history of struggle to establish the status quo policy may contribute to the sense that the policy lacks democratic legitimacy. Environmental groups’ may suspect that industry can manipulate the policy process in unseen ways, and that they may be forced in the end to accept grudgingly a policy they deem inadequate.
17. Commentators seem to be split over the two-pronged question of whether collaborative regulation can or should succeed, between those who favor collaborative regulatory reform but fear that it is unworkable under the current legal regime and those who oppose collaborative regulatory reform. As we have noted, many in the latter group disapprove of the use of stakeholder bargaining as a policy-making technique on principle, arguing that it is an abdication of authority by agencies and therefore contrary to the fundamental underpinnings of our system of administrative law.
18. One need not subscribe to a pure interest group bargaining model of the policy process in order to favor collaborative regulation of the kind discussed here. Conversely, these experiments in collaboration involve no cession of authority by agencies to private actors. In each case, the EPA retains ultimate policymaking authority and has not been hesitant to use that authority irrespective of the wishes of industry and environmental stakeholders alike.
19. To the contrary, there is a strong argument that collaborative regulation improves agencies’ pursuit of the public interest, and not simply by identifying positive-sum policy changes. Collaborative bargaining can be seen as one embodiment of a more deliberative and less adversarial policy process, one that comports with the constitutional model of deliberative democracy. Indeed, some scholars have argued that elected officials can no longer deliberate in the way the founders intended, and that agencies do a better job of deliberating over policy change in the modern world.
20. Despite its merits, however, collaborative regulation faces some remaining obstacles. While collaborative regulation may sell itself to some of its current opponents over time, the incentive to bargain strategically remains. As this Article has shown, that incentive, combined with the statutory obstacles to widespread use of collaborative regulation, imposes formidable transaction costs on bargaining. As transaction costs go up, the number of positive-sum changes worth pursuing goes down. The problem is exacerbated by the EPA’s efforts to structure the bargaining process in ways that increase those costs. Indeed, other studies of the XL program have pointed toward EPA resistance as a key component of transaction costs.
