Volume 95 - No. 1 Law Review Network

Regulation in the Behavioral Era

INTRODUCTION

Individuals do not always respond to regulation as Homo economicus, and administrative agencies have finally begun to notice.1 The fact that individuals deviate in predictable ways from neoclassical assumptions of rationality has been widely recognized in the academic literature and has become well known to the public.2 But only recently has it begun to shape regulatory policy.3 Agencies have begun to develop regulations and policies that reflect the insights of behavioral economics,4 and the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB) has intro- duced behavioral economics to White House review of agency regulations.5 As a result, the influence of behavioral economics on agency decisionmaking is likely to grow substantially. Regu- lation has entered the behavioral era.

Although behavioral research is often referred to as “beha- vioral economics,” economists are not the only sources of in- sight for making regulation sensitive to the ways in which indi- viduals depart from the traditional rational-actor model. Somewhat overshadowed in the public and policymaking world are the important insights of other fields within the behavioral and social sciences. These insights suggest, for example, that it may be as important for regulators to account for descriptive and prescriptive norms as for the insights of behavioral eco- nomics, such as framing, hyperbolic discounting, loss aversion, and so on.6 Taken together, the behavioral and social sciences suggest that a multitude of factors beyond price explain the va- riability in human behavior, and understanding these factors can make regulation more effective.7 For simplicity, we refer in this Article to behavioral economics and the related behavioral and social sciences as “behavioral science,” although we note that the term as we refer to it includes a wide range of fields, such as sociology and social psychology, that are more common- ly referred to as social science.8

Behavioral insights are important at three critical stages in the regulatory process. First, they can help to improve the manner in which agencies develop regulatory options early on in the regulatory process.9 A quick illustration is helpful. Al- though electric cars have the potential to reduce carbon- and other air-emissions, recent studies suggest that their impact and cost may vary dramatically based on whether drivers re- charge their vehicles at peak or off-peak periods (e.g., when they arrive home from work, or in the middle of the night).10