Regulatory Impact Analysis Suyash Rai, Carnegie India November 21, 2019 1
Outline 1. Introduction and rationale 2. Making Regulatory Impact Analysis useful 3. Steps in Regulatory Impact Analysis 2
Introduction
Regulatory Impact Analysis • Regulation can be beneficial, but it also imposes costs and distorts investment and innovation 3
Regulatory Impact Analysis • Regulation can be beneficial, but it also imposes costs and distorts investment and innovation • RIA is a tool to examine and measure the likely effects of new or existing regulations, and assist decision makers in taking correct decisions • Not just a product , but also a process ◮ evaluation of the problem ◮ the objective and intended effect of regulation ◮ consideration of alternative options ◮ assessment of all their impacts ◮ compliance strategies ◮ monitoring and evaluation system 3
The Rationale for RIA • For Parliaments and Presidents: A mechanism to hold regulatory agencies accountable ◮ Mitigate the principal-agent problems of delegation ◮ Make regulatory agencies engage with and be responsive to their stakeholders ◮ Place on-going constraints on regulatory agencies 4
The Rationale for RIA • For Parliaments and Presidents: A mechanism to hold regulatory agencies accountable ◮ Mitigate the principal-agent problems of delegation ◮ Make regulatory agencies engage with and be responsive to their stakeholders ◮ Place on-going constraints on regulatory agencies • For regulatory agencies: A mechanism to make better regulations ◮ Induce optimisation: alternatives are compared using a comprehensive analysis, and the best one chosen ◮ Give grounds to resist pressures from interest groups 4
The Rationale for RIA • For Parliaments and Presidents: A mechanism to hold regulatory agencies accountable ◮ Mitigate the principal-agent problems of delegation ◮ Make regulatory agencies engage with and be responsive to their stakeholders ◮ Place on-going constraints on regulatory agencies • For regulatory agencies: A mechanism to make better regulations ◮ Induce optimisation: alternatives are compared using a comprehensive analysis, and the best one chosen ◮ Give grounds to resist pressures from interest groups • Economic rationale: Regulatory quality has an effect on economic performance (Jalilian et al,2007) • Governance rationale: regulatory transparency, fairness and access to regulation (Hahn and Tetlock, 2008) 4
The Rationale for RIA • Such analysis does not come naturally to humans. • We should be wary of our ability to reason, especially about public policy ◮ Reasoning primarily serves a social function (Mercier and Sperber, 2011) ◮ Confirmation bias : we use reasoning to find evidence to support the position we intuitively hold (Haidt, 2012) ◮ High bar for evidence that goes against our intuitive views, but happy to accept weak supportive evidence (Ditto, Pizarro and Tannenbaum, 2009) • RIA can enable good reasoning and use of evidence 5
Making RIA useful
Effectiveness of RIA • Many countries have adopted RIA, but huge differences in implementation outcomes 6
Effectiveness of RIA • Many countries have adopted RIA, but huge differences in implementation outcomes • Ways of using RIA ◮ Exploratory : choose the best regulation ◮ Confirmatory : provide evidence for a given conclusion ◮ Reputational : signal credibility by conducting RIA in name only • Specific use depends on the context 6
Making RIA effective 1. Clarity of objectives and principles of regulation 2. Design regulatory agencies to encourage sound use of RIA 3. Strengthen external accountability mechanisms 7
Clarity of objectives and principles of regulation • RIAs force regulators to state the moral preferences implicit in regulations 8
Clarity of objectives and principles of regulation • RIAs force regulators to state the moral preferences implicit in regulations • Important to consider what objectives and principles should be ◮ given in the primary law, ◮ prescribed by the government, or ◮ decided by the regulator • Examples: ◮ weightage of impact on low-income households ◮ inter-generational equity 8
Clarity of objectives and principles of regulation • RIAs force regulators to state the moral preferences implicit in regulations • Important to consider what objectives and principles should be ◮ given in the primary law, ◮ prescribed by the government, or ◮ decided by the regulator • Examples: ◮ weightage of impact on low-income households ◮ inter-generational equity • Objectives, trade-offs, non-negotiables, and RIA methodological principles: most of the existing models leave too much to the expert regulators • Sometimes politicians have the temptation to allow regulators to make the decision and then take the blame 8
Institutional Design of Agencies • Governance ◮ Board structure, not all-powerful Chairperson ◮ Emphasis on diversity of boards, with a few non-experts ◮ Emphasis on consensus, with possibility of majority decision-making - force them to reason (eg. Jury) 9
Institutional Design of Agencies • Governance ◮ Board structure, not all-powerful Chairperson ◮ Emphasis on diversity of boards, with a few non-experts ◮ Emphasis on consensus, with possibility of majority decision-making - force them to reason (eg. Jury) • Regulation-making process ◮ Regulation-making process to be structured around RIA (not just delegated to staff) ◮ Transparent and communicative consultation process 9
Institutional Design of Agencies • Governance ◮ Board structure, not all-powerful Chairperson ◮ Emphasis on diversity of boards, with a few non-experts ◮ Emphasis on consensus, with possibility of majority decision-making - force them to reason (eg. Jury) • Regulation-making process ◮ Regulation-making process to be structured around RIA (not just delegated to staff) ◮ Transparent and communicative consultation process • Data and analysis ◮ Investment in information collection and research systems ◮ Information sharing across agencies ◮ Build analytical capabilities 9
External accountability • The Parliament and/or the Presidency: analytical capabilities to review RIAs coming out of regulatory agencies • Civil society consumer groups: generally limited to the chattering classes (eg. net neutrality in India) • Other regulatory innovations, such as freedom of innovation laws, are associated with strong adoption of RIA 10
Using RIA • "RIA’s most important contribution to the quality of decisions is not the precision of the calculations used, but the action of analyzing, questioning, understanding real-world impacts and exploring assumptions". • RIA should not be seen as an exact science that can be exactly replicated everywhere if the "right" methods are used 11
Steps in Regulatory Impact Analysis
Steps in Regulatory Impact Analysis 1. Problem definition and the need for regulatory action 2. Understand the baseline scenario and design the regulatory options 3. Identify the impacts of regulatory options 4. Choose a method and analyse the options 5. Special tests: sensitivity analysis; distributional impact 6. Present the recommendations along with the criteria of choice among options to the decision-maker 12
Steps in Regulatory Impact Analysis 1. Problem definition and the need for regulatory action 2. Understand the baseline scenario and design the regulatory options 3. Identify the impacts of regulatory options 4. Choose a method and analyse the options 5. Special tests: sensitivity analysis; distributional impact 6. Present the recommendations along with the criteria of choice among options to the decision-maker 13
Problem definition and the need for regulation • Problem definition: converting a vague problem into a precise statement of objective(s) • The need for regulatory action: ◮ address a significant market failure: eg. market power, information asymmetry, negative externality ◮ promote certain features of a market: eg. neutrality of the internet; expansion into remote areas; efficient spectrum management • The legal power or mandate to take regulatory action. 14
Steps in Regulatory Impact Analysis 1. Problem definition and the need for regulatory action 2. Understand the baseline scenario and design the regulatory options 3. Identify the impacts of regulatory options 4. Choose a method and analyse the options 5. Special tests: sensitivity analysis; distributional impact 6. Present the recommendations along with the criteria of choice among options to the decision-maker 15
Understand the baseline scenario and identify the regulatory options • Baseline scenario: what will happen to the problem without any additional regulation? ◮ Establish an optimised scenario ◮ Consider market forces within existing legal and regulatory environment ◮ Assume reasonable innovation and progress • Types of regulatory option ◮ Do nothing: baseline scenario ◮ Command and control ◮ Nudge towards self-regulation ◮ Incentive-based (eg. performance-linked penalties) ◮ Market-based (eg. competition; disclosures) 16
Baseline scenario and regulatory options • Example: spectrum management • Composite option ◮ Dynamic Spectrum Access and Database on Spectrum Usage ◮ Incentive auctions ◮ Monetary penalties for license breaches 17
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