The Economics of Tailored Regulation and the Implications for Project XL

EPA Grant Number: R826154
Title: The Economics of Tailored Regulation and the Implications for Project XL
Investigators: Krupnick, Alan J. , Blackman, Allen , Boyd, James W.
Current Investigators: Krupnick, Alan J. , Blackman, Allen , Boyd, James W. , Mazurek, Janice
Institution: Resources for the Future
EPA Project Officer: Lee, Sonja
Project Period: October 1, 1997 through September 30, 1999
Project Amount: $140,000
RFA: Exploratory Research - Social Science (1997) RFA Text |  Recipients Lists
Research Category: Economics and Decision Sciences

Description:

Project XL is an example of a new environmental management approach called "tailored regulation" (TR) wherein firms volunteer to negotiate site-specific, performance-based pollution control agreements with regulators and community stakeholders. Though the current administration has touted it as a "regulatory blueprint for the future," XL has often floundered, in part because no theoretical analysis exists to guide policy design. The objective of our proposed research is to develop an economic theory of TR, in order to describe the conditions under which it is to be preferred to command and control and economic incentive instruments, and to generate recommendations for designing and implementing it.

Approach:

Our research will consist of seven tasks. First, we will develop a "baseline" mathematical model to illustrate the benefits of TR. Second we will review relevant analytical literatures. Third, we will develop two analytical models that incorporate the real-world characteristics such as uncertainty, imperfect information, and rent seeking that are likely to affect the social benefits of TR. The first model will focus on the market structure and dynamic investment issues, and the second on information-theoretic and bargaining issues. Fourth, using data we have already collected, we will conduct an empirical analysis of XL projects to complement the analytical models. Fifth, we will analyze the overall strengths and weakness of TR. Sixth, we will draft a list of recommendations for designing and implementing TR. And finally, we will describe areas for future research.

Expected Results:

Intuition suggests that we may find the following. First, TR has the potential to improve efficiency by according firms more control over technology choice, creating incentives to innovate, and improving the regulator's ability to monitor. TR may even be preferable to economic incentive instruments when monitoring and transactions costs are high. However, TR may favor large firms in mature industries and those with special relationships with local stakeholders. This would be undesirable if it discouraged the participation of firms likely to have innovative pollution control strategies, impeded competition, or exacerbated rent seeking, but would be desirable if it sparked races to secure TR agreements. It should be possible to mitigate TR's undesirable impacts and magnify its desirable ones by carefully structuring program rules governing participation, the allocation of participation costs, and negotiations. For example, the regulator could encourage small or innovative firms to participate by limiting participation in some industries to better enable firms to appropriate the benefits of TR.

Publications and Presentations:

Publications have been submitted on this project: View all 7 publications for this project

Journal Articles:

Journal Articles have been submitted on this project: View all 2 journal articles for this project

Supplemental Keywords:

Tailored regulation, regulatory reform, Project XL, economic theory., RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Economics, decision-making, Social Science, Economics & Decision Making, policy analysis, Project XL, economic benefits, performance based pollution control agreements, cost benefit, economic incentives, environmental policy, tailored regulation, regulatory reform, public policy, benefits assessment, social sciences

Progress and Final Reports:

  • 1998
  • Final Report