2017 Conference - Session 7

Session 7 - Friday, March 17, 2:00 - 3:30pm

A.7: Developing Guidance or Best Practices for Regulatory Impact Analysis (Roundtable)

Chair: Lisa A. Robinson, Harvard University

Circular A-4 provides the Office of Management and Budget’s guidance to Federal agencies on the development of regulatory analysis as required under Executive Order 12866. Although useful, many Federal agencies find developing additional guidance and best practices specific to the needs of their agencies useful. This roundtable features economists from different agencies discussing current efforts to develop guidance and best practices to improve the quality, consistency, and policy-relevance of regulatory impact analysis at their agencies.

Panelists:

Deborah Aiken, U.S. Department of Transportation
Elizabeth Ashley, U.S. Office of Management and Budget
Amber Jessup, U.S. Department of Health & Human Services
Al McGartland, U.S. Environmental Protection Agency
Clark Nardinelli, U.S. Food and Drug Administration

B.7: Ex Ante and Ex Post Applications of BCA

Chair: Richard Bruns, U.S. Food and Drug Administration

Discussant: Brian Mannix, The George Washington University

Presentations:

1. Retrospective Benefit-Cost Analysis of Federally-Funded Buyback Programs for Southeast Alaska Salmon Purse Seine Permits; Keith Criddle*, University of Alaska Fairbanks

In 1975, the Alaska Commercial Fisheries Entry Commission (CFEC) issued 419 perpetual transferable limited entry permits (LEPs) that entitle participation in the Southeast Alaska salmon purse seine fishery. Beginning in the 1990s, ever increasing global supplies of farmed salmon precipitated a collapse in ex-vessel prices for wild salmon and concomitant declines in ex-vessel revenues and permit values such that by the early 2000s, ex-vessel prices and the value of LEPs hovered at around 20% of their peak values. In response, fishermen lobbied for and secured a buyback program to permanently retire of some permits. The first phase of the buyback program was financed under a federal grant and led to the retirement, in 2008, of 35 permit. The second phase was financed under a federally-backed fishery reduction loan that led, in 2012, to the retirement of 65 additional permits. It was anticipated that these reductions in the supply of LEPs would bolster average revenues for remaining vessels and increase the market value of remaining permits. The goal of this analysis is to determine whether the increased value to remaining permittees offsets the cost to taxpayers of financing the buyback. Conducting that cost-benefit assessment necessitates disentangling concomitant but unrelated changes in ex-vessel prices and catch volumes. Multivariate statistical analysis indicates that the buybacks were in increased the asset value of permits and forestalled the reentry of latent fishing capacity. However, because the buybacks do not alter the fundamental conditions that predispose the dissipation of rents, relief accorded by the buyback is likely to be ephemeral.

2. Combining Ex Post and Ex Ante Analyses to Assess the Performance of a Historical Biocontrol Program for Diffuse Knapweed; Duncan Knowler*, Simon Fraser University

According to a recent study, 25 % of Canada’s endangered species are at risk because of alien species. While significant work has been done on valuing the potential benefits from control of invasive plants in the US, little has been done in Canada. Diffuse knapweed is a rangeland weed introduced to North America from the Mediterranean region and western Asia. Both managed rangelands and disturbed sites are susceptible to invasion. We use a modified BCA framework to assess the economic merits of an historical biocontrol program for diffuse knapweed in British Columbia (BC), Canada. Because our analysis takes an ex post perspective, it differs from many ex ante analyses that instead forecast hypothetical benefits and costs using the best information available (e.g. government records, published papers). However, we also simulate an alternative or counterfactual scenario assuming chemical treatment was used instead of the actual biocontrol program, but since no such program existed we used data from local spraying programs to generate the necessary information. This counterfactual allowed us to consider whether the historical biocontrol program was actually the preferred control program for diffuse knapweed and not just whether it met a strict BCA test on its own. This approach mimics the common formulation of many ex ante benefit-cost studies that compare several project alternatives. For the all-inclusive analysis of the diffuse knapweed biocontrol program, we estimated an NPV of $16.0 million (all prices 2006) with baseline assumptions and a 4 percent discount rate. In contrast, our simulated economic analysis of the baseline scenario for the chemical treatment of knapweed indicated a negative NPV. Based on our comparison of the two programs, it seems clear that the biocontrol program was a success and the preferred control method. We conclude the paper with a discussion of our results, including several caveats, and recommendations for evaluating future control programs.

3. Benefit-Cost Analysis in Educational Regulatory Actions; Viviana Rodriguez-Andrade*, CBCSE - Columbia University

Under Executive Order 12866, all significant regulatory actions in federal education policy should provide estimates of their anticipated costs and benefits. Yet, the application of Benefit-Cost Analysis to education policy is far from straightforward. In this paper we critically evaluate prior education BCAs with respect to methods, findings, and conclusions. We base our evaluation on extensive documentation from OIRA reports on over 30 education BCAs from 2005-2015. Our initial evidence indicates that these BCAs generally apply consistent costing methods but rarely estimate benefits precisely; and very few report BC ratios or Net Present Values. We highlight several areas where BCA practice might be enhanced.

C.7: Distributional Issues: Applications in Energy and the Environment

Chair: Kelly Maguire, U.S. Environmental Protection Agency

Presentations:

1. Preferences for Equality in Environmental Outcomes; William Raich*, Industrial Economics, Inc.

Benefit-cost analyses of health regulations traditionally evaluate their economic efficiency—ignoring equity. To help address the importance of equity, we develop a survey to elicit respondents’ preferences towards equality in health risks stemming from environmental causes. Survey responses are used to parameterize an Atkinson index over environmental health risks. We compare these results to similar questions in the income context and find that respondents are significantly more averse to inequality in health risks than in income. The mean respondent is willing to accept a 22% increase in average health risk if risks are equally distributed in the population, but willing to accept a decrease of only 5% in average income if incomes are equally distributed in the population. We find that 30% of respondents answer health risk questions lexicographically—always preferring an equal distribution of risks to an unequal distribution, even if the latter makes everyone better off.

2. Differential and Distributional Effects of Energy Efficiency Surveys: Evidence from Electricity Consumption; Thomas Kniesner*, Claremont Graduate University

Our research investigates the magnitude of the effect of residential energy efficiency audit programs on subsequent household electricity consumption. There is only a one-time interaction between households, which participate voluntarily, and the surveyors. Our research objective is to determine whether and to what extent such surveys lead to behavioral changes. We argue that the perceived complexity of the surveys’ personalized feedback will determine whether the subsequent behavior is sustainable. We then examine how persistent the intervention is over time and whether the effects decay or intensify. The main evaluation problem, however, involving the surveys is participants’ self-selection. To address this econometrically, we propose two non-parametric estimators involving kernel-based propensity score matching. In the first method we use “difference-in-differences” (DID) estimation. The second estimator is quantile DID, which produces estimates on distributions. Importantly, the comparison group consists of households who were not yet participating in the survey but participated later. Our evidence suggests that the customers who participated in the survey, which cost about $12 to administer, reduced their electricity consumption by about 7%, compared to customers who had not yet participated in the survey. In addition, as the quantiles of the outcome distribution increase, the effect of the program decreases. Considering the total number of high usage households participated to the survey in 2009, electricity consumption reduced by an aggregate 1.8 million kWh per year, an amount approximately equal to consumption of 3,200 average households in California in a month or an estimated 1,258 metric tons less of carbon dioxide emissions.

3. Are There Distributional Impacts from the National Flood Insurance Program?; Okmyung Bin*, East Carolina University

This study examines possible redistributional effects of the National Flood Insurance Program, using a nationwide database of flood insurance policies and claims from the Federal Emergency Management Agency. Exploiting the tax and transfer progressivity literature we use the departure from per capita income proportionality at the zip code level as our measure of progressivity. Our findings indicate that premiums as a percentage of coverage purchased are mildly regressive: premium shares are larger than income shares for lower-income zip codes. Payouts, however, also as a percentage of coverage purchased, are progressive, meaning lower-income zip codes receive a larger portion of claims paid. Overall net premiums (premiums – payouts) divided by coverage are also regressive, with an income elasticity close to zero, indicating flood insurance behaves like a lump sum tax. We offer several policy proposals to ameliorate regressivity in the NFIP.

4. Distributional Weights in Environmental Valuation and Cost-Benefit Analysis; Vaino Nurmi*, Finnish Meteorological Institute

The economic valuation of public goods, including environmental ones, and the methods applied in BCA are built on the Kaldor-Hicks efficiency criterion. To determine Kaldor-Hicks efficiency we need to measure whether winners have gained more than the losers have lost. Usually this is done by measuring the benefits and costs in money, making income the numeraire. Without adjusting or “weighting” the monetary welfare changes by differences in the social marginal utility of money, BCA is systematically favorable to those who value money the least relative to alternativenumeraires. Consequently BCA is not symmetric between agents' preferences.

Distributional weights were for a long time a standard in public and welfare economics to compensate for the differences in the individuals' monetized values, but have been largely neglected in both practice and theory in the past few decades. An exception is climate change economics, in which the climate change impacts of poor countries received more weight relative to the effects on rich countries. In climate change studies, it has been shown that the addition of weights can change the results by two orders of magnitude. Our hypothesis is that similar kinds of results could be shown in environmental BCA at other than global scales.

Whether or not the neglect of distributional weights is a problem depends on the use of taxes and the form of individuals' utility functions. We go through the theoretical arguments in favor of and against weighting, and present the options to design such weights, including the theory behind the designs.

Aside from the theoretical issues, it is also important to test how the weights affect the results of BCA. We use pre-collected data of individuals' WTP/WTA for emission mitigation paired with income, to test the effects of the weights on the BCA. We show that different weighting schemes (or their absence) can result in very different policy recommendations.

D.7: Benefit-Cost Analysis in Economic Development

Chair: Julian Cristia, Inter-American Development Bank

Presentations:

1. Educational Gender Discrimination and its Economic Developmental Impact; Fatima Ali*

The countries of Asia are at different levels of economic development. In educational development too they are not uniform. Historical Legacies and other factors have impacted on the modernization course that each country embarked upon. These countries can benefit and are benefiting by doing studies that compare their experience in development with that of the more advanced nations of the west. However, there is much that they can learn by studying about each other inside Asia; likewise, they have much to offer to the outside world.

In what follows we look at the attempts of some of the Asian countries to eliminate gender discrimination in education and how these impacted on their course of modernization. We would also look at the impact of education on the female labor force participation. Finally, we attempt an interregional comparison and the main focus will be on East Asia the best performing region and South Asia the worst performing region. As the countries of Asia stands at different levels of development this exercise is similar to the one that compares a developing countries experience with that of a developed countries historical experience, further countries at nearly the same level of economic development too have much to learn from each other as the educational development and the degree to which the elimination of gender discrimination in education has proceeded aren’t the same.

The benefits that a country gains by eliminating gender discrimination in education are enormous as we will try to document. Likewise, the losses a country undergoes by neglecting to educate girls and women are substantial.

2. Access and Quality in Higher Education Project (Paces) - Higher Education Student Loans in Colombia; Felipe Lozano-Rojas*, Indiana University and World Bank

The article developed will present the results of a benefit-cost analysis addressing the goals and challenges faced by the Colombian government, student loan agency, ICETEX, using input data from tertiary education information systems which allow to forecast the average differences in relevant outcome variables for students with and without student loans, outcomes such as dropout, dropout, and employment rates, across education levels. We try to address the question of how to provide the best assessment possible given the restrictions on data availability.

To promote quality and foster its role in access to tertiary education in Colombia, ICETEX, the main student loan agency of the country is studying the possibility of reforming their current student loan program. On the other hand, to promote quality ICETEX introduced a handful of reforms, which have limited the reach of their resources. For instance the agency started providing 100% student tuition funding, strengthened high quality accreditation requirements which are more expensive, and it is developing a new program to foster productive research in the Colombian academia. The project affects ICETEX supply of student loans, differentiating in interest rates charged to students as well as in the share of payments made during the studying period, from 0% of capital up to 100%.

Additional to this policy, ICETEX is also adapting to an environment in which interest rates subsidies are capped to address the fiscal pressure that these subsidies were exerting over the Colombian Ministry of Education finances. In context, ICETEX, moved from providing student aid for 20,000 students per year in 2003 to more than 65,000 in 2014. The analyzed project will level the number of students per year at 64,000 mainly among the most vulnerable students.

3. Gender Impacts in Benefit-Cost Analysis; Bahman Kashi*, Queen's University; Jennifer Watt and Kamin Peyrow, Queen’s University; Stephanie Schmidt, International Development Group

Most major organizations have policies in place to address gender gaps in developing countries and increase their understanding of gender impacts in project design, monitoring, and evaluation. However, the incorporation of gender considerations in the practice of cost-benefit analysis is still far from ideal. There is still no or very limited quantitative analysis done on direct investments that target gender gaps as their main objective.

This study seeks to identify theoretical and practical ways of integrating gender impacts into benefit-cost analysis of international development projects. Cultural norms and gender gaps create constraints and opportunities that can affect the outcome of international development projects. An overview of such experiences is provided here in health and agriculture sectors, and alternative metrics and measures used to report and estimate impact by gender are compared. Furthermore, policies and practices of major international development institutions including policies that affect the project identification and design process, as well as those used during monitoring and evaluation are reviewed.

The results highlight the significant gaps concerning quantitative evidence that support gender-related assumptions in benefit-cost models. The study then recommends ways to coordinate efforts and funding to cover this information gap, learning from the way in which the integration of environmental impacts has progressed over the past 20 years.

This material is based upon work supported by the United States Agency for International Development under the Learning, Evaluation and Analysis Project-II (LEAP-II) award number AID-OAA-I-12-00042/AID-OAA-TO-14-00046.

4. Estimating Mortality and Economic Costs of Particulate Air Pollution in Developing Countries: The Case of Nigeria; Natina Yaduma*, American University of Nigeria

The value of statistical life is an essential parameter used in ascribing monetary values to the mortality costs of air pollution in health risk analyses. However, this willingness to pay estimate is virtually non-existent for most developing countries. In the absence of local estimates, two major benefit transfer approaches lend themselves to the estimation of the value of statistical life: the value transfer method and the meta-regression analysis. Using Nigeria as a sample country, we find that the latter method is better tailored than the former for incorporating many characteristics that vary between study sites and policy sites into its benefit transfer application.

It is therefore likely to provide more accurate value of statistical life predictions for very low income countries. Employing the meta-regression method, we find Nigeria’s value of statistical life estimate to be $489,000. Combining this estimate with dose response functions from the epidemiological literature, it follows that if Nigeria had mitigated its 2006 particulate air pollution to the World Health Organisation standards, it could have avoided at least 58,000 premature deaths and recorded an avoided mortality related welfare loss of about $28 billion or 19 % of the nation’s GDP for that year.

E.7: Benefits and Costs in the Regulation of Financial Markets

Chair: Heidi King

Presentations:

1. Benefits and Costs of Bank Regulatory Capital Standards; James R. Barth, Auburn University; and Stephen Miller*, Mercatus Center at George Mason University

Banking legislation in the U.S. has historically been driven more by the politics of banking than sound economic analyses. Following the most recent and severe banking crisis since the Great Depression, legislation has been enacted that instructs the banking authorities to impose stricter and higher capital requirements on banks, among other more stringent restrictions. Our focus is on estimating the marginal benefits and costs of increasing the leverage ratio from 4 percent to 15 percent. We draw from Miles, et al.’s (Economic Journal (2013)) approach to comparing the benefits and costs of higher regulatory capital requirements. To estimate benefits, we multiply the the loss per crisis, calculated as in Miles, et al. (2013), by the marginal effects at representative values from probit regressions applied to annual data from 1892-2014 that measure the relationship between changes in the leverage ratio and changes in the probability of a banking crisis; we find similar results using logit and complementary log-log regressions.

We weigh these benefits against the costs in terms of reduced lending, arising from banks passing off the higher equity costs resulting from a higher leverage ratio onto borrowers. To measure the costs, we use data for all bank holding companies with at least $1 billion in total assets between Q1 1996 and Q4 2014. We find that the marginal benefits cover marginal costs in more than 95 percent of the 256 cases we consider. Fails arise when we assume low benefits and high costs. Higher taxes, an increased market risk premium, a greater fraction of corporate funding coming from bank loans or a lower cost of a crisis tend to lower the net marginal benefit, while assuming banking crises generate permanent shocks or increasing the discount rate tends to increase the net marginal benefit.

2. The Systemic Risk Paradox: Costly Regulations and Consolidation in Heterogeneous Financial Markets with Uncertainty; Sharon Brown-Hruska* and Trevor Wagener, NERA Economic Consulting

Following the enactment of the Dodd-Frank Act in 2010, regulation of financial markets in the United States has become both qualitatively more cumbersome and quantitatively more costly for market participants. Much of the new regulation has been justified by concerns about systemic risk in financial markets. However, many of the new regulations impose both fixed and variable costs for market participants, and may create barriers to entry through one-time compliance startup costs in those markets. If there are fixed compliance costs and initial compliance startup costs, such regulations may drive consolidation through economies of scale in compliance, and may prevent market entry during boom periods through barriers to entry. Such consolidation may actually increase the systemic risk in that market, which has the potential to reverse all of the expected benefits of such regulations.

We present a multi-period partial equilibrium model of an OTC derivatives market with uncertainty about future market conditions and heterogeneous market participants, divided into an end-user category and a dealer category. We model the implications of new regulations imposing startup, fixed, and variable costs on market participants, and consider the relevance of ex ante barriers to entry in assessing new regulatory barriers to entry. We also examine the implications within the model of including a requirement for central clearing, either universally or for those participants who have crossed an exposure threshold. We conclude that under plausible assumptions about market participant heterogeneity, counterparty credit exposures, and economies of scale, markets with costly regulatory regimes may increase in systemic risk over time.

3. Improvements in SEC Economic Analysis since Business Roundtable: A Structured Assessment; Jerry Ellig*, Mercatus Center at George Mason University

Several D.C. Circuit decisions that remanded regulations to the Securities and Exchange Commission (SEC) provide a natural experiment that permits researchers to identify the correlation between judicial review and the quality of regulatory agencies’ economic analysis and its use in decisions. Subsequent to these decisions, the SEC staff in 2012 issued new guidance for economic analysis. This paper offers a structured assessment of the economic analysis accompanying a sample of post-2012 SEC regulations, utilizing the evaluation method developed for the Mercatus Center at George Mason University’s Regulatory Report Card. SEC economic analysis improved substantially following issuance of the 2012 guidance.

Improvement occurred on all major elements the SEC staff identified as important in its guidance: explanation of the justification for the regulation, clear definition of the baseline against which to measure the rule’s economic impacts, identification and discussion of reasonable alternatives, and analysis of the benefits and costs of the proposed rule and the principal alternatives. The improvement occurred both on criteria that address “conceptual” economic analysis and on criteria that require quantification of benefits or costs to receive full credit. Although there is still substantial room for improvement, the court decisions appear to have motivated the SEC, in just a few years, to close the gap between the quality of its economic analysis and the average quality of economic analysis produced by executive branch agencies.

4. International Trade and the Willingness to Pay by SMEs for Online Banking Services; Glenn Jenkins*, Queen’s University and Eastern Mediterranean University and Parvaneh Shahnoori, Eastern Mediterranean University

The objective of this study is to determine the important attributes of online banking services for small and medium-sized enterprises (SMEs). Of particular interest are the attributes relevant to SMEs engaged in international trade. A choice experiment (CE) method is used to value the attributes of online banking services, namely travel time saved, waiting time saved, unlimited 24/7 accessibility, and a high level of security. The data were collected through face-to-face interviews with 400 SME financial managers/owners from the Free Trade Zones of the United Arab Emirates (UAE). Using mixed logit estimation models, the results of this research show that 24/7 accessibility to banking services and a high level of security are highly valued by these enterprises. If these attributes are absent, over 93% of the value of the service to the SME owners is lost. The willingness to pay (WTP) for a high-quality service is very substantial, rising from $163.31 per month for those firms not involved in international trade to $736.26 per month for those SMEs who export in excess of 25% of what they produce. At the same time, supplying such banking services provides banks with an opportunity to enjoy an overall reduction in their operating costs. Governments should provide a regulatory environment for their financial sector that will facilitate the provision of such high-quality banking services to their SME sector.