An Options Approach to Agency Rulemaking

61 Pages Posted: 26 Jan 2013 Last revised: 27 Jul 2014

Date Written: December 22, 2013

Abstract

Administrative agencies must often engage in rulemaking in the presence of substantial factual uncertainty, mixed empirical findings, and untested claims. Given these challenges, a recent D.C. Circuit case, Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), is thought to have significantly raised the bar for rulemaking by independent agencies. Under the standard the court applied, many potentially efficient rules may not survive judicial review because agencies lack the hard data required with which to refute speculative comments. In response, this Essay suggests that agencies should take a more outcome-oriented approach to rulemaking by making use of “options.” In particular, when an agency is seeking to adopt a controversial rule against opposition from strong interest groups, it should strategically commit to an efficient ex post modification of the substance or the coverage of the rule and thereby partly relieve itself of its ex ante burden of justification. The agency’s ex ante burden of justification should be reduced because if the rule comes coupled with an enforceable, efficient ex post modification scheme, its net expected benefit will necessarily be higher. Specifically, as compared to the case when the rule is adopted without such a scheme conferring option values, the economic cost of the rule will be reduced by the value of a contingent ex post repeal (under the “real options” approach) or the value of conditional ex post exemptions (under the “menu-of-options” approach). Reviewing courts, in turn, should recognize this higher net expected benefit resulting from the option value of the rule structure, and should therefore be more deferential to the agency’s policy choice in such instances. As with the case of options generally, this approach is particularly valuable when the variance of the net expected benefit is high. This Essay discusses the theoretical framework of the suggested approach, its proper scope as well as potential pitfalls, and the simplest ways to implement it.

Keywords: administrative law, agency rulemaking, Business Roundtables, option value, cost-benefit analysis, sunset provision, exemption

JEL Classification: D73, D61, D78, D83, D84, K00, K23, K20

Suggested Citation

Lee, Yoon-Ho Alex, An Options Approach to Agency Rulemaking (December 22, 2013). 65 Administrative Law Review 881 (2013), Available at SSRN: https://ssrn.com/abstract=2207196 or http://dx.doi.org/10.2139/ssrn.2207196

Yoon-Ho Alex Lee (Contact Author)

Northwestern Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
(312) 503-2565 (Phone)

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