Behavioral regulatory agencies

I gave a presentation on bounded rationality in policy making and how it affects regulatory agencies at the University of Paris-Dauphine on Monday. I included this in the conclusions of the draft paper (I will upload it when I have a cleaner version...):

"Regulatory agencies as institutions and the policies they implement are fragile, and their structure and powers are the outcome of a changing political game. The degree of regulatory independence and the horizontal (such as the number of agencies) and vertical (such as the allocation of responsibilities at federal or state level) structure of agencies is far from stable. They change with technology and demand (in product or in related markets, such as capital markets) and with the outcome of games played between governments, legislatures and the relevant interest groups. Non-optimizing behavior by these agents, expert biases and related de-biasing strategies, and a concern for fairness and process, modify the traditional regulatory game. The main result/message after looking at independent regulation with a behavioral lens is that on the one hand independent regulators are seen as part of a potentially more robust regulatory system, and on the other hand their contribution to this system can be based on a wider range of instruments.

Agencies need feedback, review and interaction, but they may have an advantage as a commitment device and an ongoing repository of knowledge  with an identity of public service. Delegating into an independent potentially biased regulatory agency some aspects of the policy vector must be compared to the behavioral issues raised by the alternatives to delegation to alleviate the commitment problem (for example, popular capitalism and rigid legislation may raise significant problems from the point of view of behavioral political economy).

The analysis should be directed at how to make regulation more robust. Levin and Lo look at the natural world for inspiration on the properties of regulatory systems that are the result of evolution and that reduce the fragility of organisms and their interaction in ecological systems. The analysis of the evolution of complex systems could help in suggesting traits of individuals and interactions that facilitate regulatory stability. Reform proposals should consider a limited and accountable role for experts, perhaps in the context of more realistic models of the behavior of expert technocrats and how they interact with society. The pretence of knowledge was mentioned by Hayek  as the key limitation of planning systems. After the cold war, a similar argument could be made for the limits of expert technocracies.

In a complex increasingly interconnected society, globalization and federalism should be taken into account in attempts to build more robust regulatory systems. Glaeser argues that “small scale experimentation is helpful, and federalism continues to have value in allowing for laboratories of democracy.” Aspects of regulatory governance that have little to do with technology or demand, but with perceptions, saliency and stability, may determine which is the ideal locus of regulatory authority."