Coase-Sandor Working Paper Series in Law and Economics

Publication Date

2021

Publication Title

Coase-Sandor Working Paper Series in Law and Economics

Abstract

A central question in law and economics is whether non-tax legal rules should be designed solely to maximize efficiency or whether they also should account for concerns about the distribution of income. This question takes on particular importance in the context of cost-benefit analysis. Federal agencies apply cost-benefit analysis when writing regulations that generate multibillion dollar impacts on the US economy and profound effects on millions of Americans’ lives. In the past, agency cost-benefit analyses typically have ignored the income-distributive consequences of those regulations. That may soon change: On his first day in office, President Biden instructed his Office of Management and Budget to propose procedures for incorporating distributive considerations into cost-benefit analysis, thus bringing renewed relevance to a long-running law-and-economics debate.

This article explores what it might mean in practice for agencies to incorporate distributive considerations into cost-benefit analysis. It uses, as a case study, a 2014 rule promulgated by the National Highway Traffic Safety Administration (NHTSA) requiring new motor vehicles to have rearview cameras that reduce the risk of backover crashes. As with most major federal regulations that impose large dollar costs, the principal benefit of the rear visibility rule is a reduction in premature mortality. Quantitative cost-benefit analysis typically translates mortality reductions into dollar terms based on the “value of a statistical life,” or VSL. Any distributive evaluation of the rule will depend critically on a parameter known as the “income elasticity of the VSL,” which reflects the relationship between an individual’s income and her willingness to pay for mortality risk reductions. Although agency cost-benefit analyses use the same VSL for all individuals regardless of income, the Department of Transportation—of which NHTSA is a part—has issued guidance on the income elasticity of the VSL for other purposes. When this article applies the Department of Transportation’s income-elasticity guidance in its distributive analysis, the rear visibility rule appears to be “regressive”: it generates net costs for lower-income groups and net benefits for higher-income groups. Rerunning the distributive analysis with equal dollar VSLs at all income levels, the rule appears to be “progressive”: lower-income individuals are the primary beneficiaries and higher-income individuals are the losers. The article goes on to explain why assumptions about the relationship between income and the VSL will have important implications for distributive analyses of other lifesaving regulations.

The article then asks what agencies ought to do: should they incorporate distributive objectives into cost-benefit analysis by assigning greater weight to dollars in lower-income individuals’ hands, and should they assign different dollar VSLs to individuals with different incomes? The two questions are closely linked. Incorporating distributive objectives into cost-benefit analysis of lifesaving regulations while maintaining equal dollar VSLs for rich and poor will potentially produce perverse outcomes that—according to standard economic thinking—actually redistribute from poor to rich. After canvassing options, this article ultimately concludes that the status quo approach—equal weights for low-income and high-income individuals’ dollars, equal dollar VSLs for low-income and high-income individuals—makes practical sense in light of expressive concerns, informational burdens, and institutional constraints. The article ends by reflecting on the case study’s lessons for broader debates over legal system design, and it explains why the issues that arise in the rear visibility case study are likely to affect other efforts to redistribute through non-tax legal rules.

Number

926

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