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The Limits of the Economic Analysis of Regulation: An Empirical Case and a Case for Empiricism *
Author(s) -
MAKKAI TONI,
BRAITHWAITE JOHN
Publication year - 1993
Publication title -
law and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.534
H-Index - 45
eISSN - 1467-9930
pISSN - 0265-8240
DOI - 10.1111/j.1467-9930.1993.tb00110.x
Subject(s) - compliance (psychology) , variance (accounting) , point (geometry) , economics , economic analysis , cost–benefit analysis , monotonic function , public economics , microeconomics , econometrics , mathematics , law , psychology , accounting , political science , social psychology , geometry , agricultural economics , mathematical analysis
Can the tools of the economic analysis of law be used to identify the optimal level of stringency in regulatory standards? Data on the costs of nursing home regulatory compliance suggest that in this domain such models could only produce wildly false estimates of the optimal level of stringency. Among the reasons for this are that: ( a) actual costs of compliance explain only 19 percent of the variance in the subjectively expected costs that should inform rational choices; and ( b) while there is a powerful effect of expected cost on compliance disaggregated by standard, this is not a monotonic increasing effect but a parabolic relationship. The reason for the finding that almost half the nursing homes lie on the wrong side of the turning point of this parabola is that these homes tend to be run by managers who are “disengagers” from the regulatory culture. Their behavior is not to be understood in terms of rational game playing but in terms of dropping out of the regulatory game. The disengagers are in the regulatory system but not of it and certainly not economically calculative about it.