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Regulation in the Behavioral Era

By Michael P. Vandenbergh, Amanda R. Carrico, & Lisa Schultz Bressman. Full text here.

Administrative agencies have long proceeded on the assumption that individuals respond to regulations in ways that are consistent with traditional rational-actor theory, but that is beginning to change. Agencies are now relying on behavioral economics to develop regulations that account for responses that depart from common sense and common wisdom, reflecting predictable cognitive anomalies. Furthermore, political officials have now called for behavioral economics to play an explicit role in White House review of agency regulations. While this is a significant development for the regulatory process, our understanding of how behavioral insights should alter regulatory analysis is incomplete. To account for behavioral anomalies, regulators will need to draw on behavioral and social science findings beyond behavioral economics. In addition, they will need an analytic framework to ensure that regulatory decisions reflect a comprehensive examination of the numerous, seemingly haphazard behavioral insights from other disciplines. Although behavioral research has demonstrated the limits of rational action, it does not provide a framework for considering extra-rational action. Nor have legal scholars developed such a framework, despite excellent theoretical work in the area. In the Article, we take an initial step toward implementing such a protocol. We provide a framework to facilitate agency consideration of extra-rational action, and extend that framework to include a lesson from behavioral research that academics have noted but not adequately explored: that individuals are concerned with social outcomes (e.g., social status or inclusion) as well as monetary outcomes (e.g., wealth), and that they seek to maximize utility both in rational and extra-rational ways. After sketching our framework, we offer concrete applications in the energy-use context. Our framework does not resolve all issues that may arise in the behavioral era, but it provides a means to move forward.