THE COST-BENEFIT ANALYSIS OF FINANCIAL REGULATION:
WHAT THE SEC IGNORES IN THE RULEMAKING PROCESS,
WHY IT MATTERS, AND WHAT TO DO ABOUT IT
Edward Sherwin*
(Draft as of December 19, 2005)
TABLE OF CONTENTS
I. INTRODUCTION...................................................................................................... 2
II. COST-BENEFIT ANALYSIS IN ADMINISTRATIVE RULEMAKING............................. 7
A. Varieties of Cost-Benefit Analysis ......................................................... 7
B. Critiques of Cost-Benefit Analysis ......................................................... 9
1. Incommensurability.................................................................. 10
2. Indeterminacy........................................................................... 10
3. Bias........................................................................................... 11
4. Flawed Data ............................................................................. 13
5. Poor Track Record ................................................................... 14
C. Defenses of Cost-Benefit Analysis ....................................................... 15
1. CBA Is a Decision Procedure, Not a Moral Standard.............. 16
2. CBA May Account for Redistributive Concerns ..................... 16
3. CBA Helps Cabin Agency Discretion...................................... 18
4. CBA Corrects Regulators Cognitive Biases ........................... 19
D. A Brief History of CBA in the Administrative State ............................ 22
1. Congressional Action ............................................................... 23
2. Presidential Action ................................................................... 27
E. Economic Analysis Under Executive Order 12,866 ............................ 31
III. COST-BENEFIT ANALYSIS OF FINANCIAL REGULATION.................................... 37
A. SEC Practice............................................................