Incorporating Equity in Regulatory and Benefit‐Cost Analysis Using Risk‐Based Preferences

Abstract

The analysis of federal regulations focuses on the analysis of economic efficiency through standard benefit-cost analysis in which reductions in risk tend to represent benefits and variability may be investigated through sensitivity or simulation methods. Such analyses typically ignore distributional consequences that can affect decisions. Although analytical guidance from the Office of Management and Budget (OMB) mentions distributional consequences, there is little specificity regarding how it might be analyzed. Specificity might be improved by OMB: (1) communicating and enforcing distributional impacts as more central to the process, (2) identifying default types of descriptive distributional statistics, (3) identifying whether legislation has created a constraint to not harm a subgroup, and (4) requesting a distributional sensitivity test of the net benefits along with a standard benefit-cost analysis. Although such actions have a data collection and analysis cost, they may make the results of regulatory analysis more relevant by investigating both efficiency and equity measures.