Friday, January 27, 2017
Can regulators be better than rational?
I will be working in the next few months on a revision of my paper on behavioral regulatory agencies, to be presented at a promising meeting about organizational and institutional economics in May in Corsica. Contrary to some neo-Austrian or neo-Public Choice approaches, I do not believe that the bounded rationality of regulators implies a presumption in favor of deregulation. I agree with these neo-Hayekians that traditional neoclassical economics has excessive faith in technical fixes designed by experts to de-bias ordinary citizens and maximize social welfare at the same time. Notice that these de-biasers should be ultra-clever: they have to help citizens maximize their individual welfare and in addition correct market failures (two separate and challenging tasks). Of course expert bias challenges this faith in the traditional regulator. However, expert bias is just one source of bounded rationality. It may come in a variety of forms: action bias, over-confidence, tunnel vision, availability bias... However, there are at least two other sources of bounded rationality for regulators: non-optimizing behavior and non-standard preferences. First, regulators and policy-makers may behave more in a satisficing way rather than in a maximizing way, as we know since the times of Herbert Simon. As a result of that, administrations have routines that only become altered when shocking events happen. This may be a corrective on self-interested regulators that may be tempted by capture or other rational but not necessarily welfare-maximizing decisions. Secondly, regulators may have intrinsic preferences or be under the influence of social norms, and their constituencies or stakeholders may value fair processes and acts of communication. To use an expression previously used by Elinor Olstrom and others, regulators may also be "better than rational." Perhaps that is why Shiller and Akerlof in their book "Phishing for Phools" argue that many regulators are not captured by industry because they have an intrinsic preference for doing their job well, or that is why Akerlof at a recent talk in Madrid about water regulation argued that narratives could be useful to convince voters-consumers-citizens that water conservation and quality in water are valuable. The outcome of all this mixture of sources of bounded rationality may be better or worse than the technical regulation expected by neo-classical economists, but we should not necessarily conclude that the normative prescription should be in general less regulation.