Joseph E. Aldy
Regulations represent the primary tool for governments to remedy market failures. The modern administrative state has established a set of institutions – regulatory governance – that shape, constrain, and guide regulators in the development of such regulations. Requiring transparent analyses of the benefits and costs of proposed rules and subjecting them to public comment and legislative review can address a number of pitfalls in political markets, including regulatory capture and principal–agent problems as regulators attempt to implement the will of the public, the legislature, and/or the executive. New Institutional Economics frameworks and tools provide the means for evaluating the impacts of regulations and the impacts of regulatory governance on policy-relevant outcomes. This chapter highlights five areas where future research could further illuminate the role of institutions in influencing government’s efforts in correcting market failures: (1) prospective benefit–cost analyses; (2) ad hoc retrospective analyses; (3) 1-in/X-out regulatory cost budgets; (4) cumulative regulatory costs; and (5) non-regulatory contexts.