Introduction
Regulatory regimes shape economic activity by defining the costs, risks, and informational conditions under which firms and individuals operate. When a regime’s operational features are not aligned with prevailing technologies and institutional arrangements, the resulting misalignment can cause the regime to impose more constraint than is necessary to achieve its intended social outcomes. This misalignment generates frictions, which take the form of compliance costs and administrative requirements that exceed what is necessary to internalize relevant externalities or correct underlying market failures. As these frictions accumulate, they make entry into economic activity less attainable. Restricted entry reduces output and slows the diffusion of welfare enhancing technologies and practices. These dynamics create a need for strategies that restore alignment between the design of the regime and contemporary technological and institutional conditions.
One such strategy is enabling regulation, an approach that modernizes pathways, categories, and compliance structures without reopening or renegotiating a regime’s substantive aims. It reduces frictions by updating misaligned elements of the regime, lowering compliance and administrative costs, reducing uncertainty about regulatory expectations, and improving information flows. It also targets the subset of what Sunstein (2019) characterizes as regulatory sludge that should be reduced or removed, distinguishing these unjustified burdens from the frictions that continue to serve a regulatory purpose. Although the regime’s substantive aims could be reconsidered as technologies and risk profiles evolve, doing so requires reopening the underlying risk and policy determinations, which broadens the scope of the decision and slows the implementation of needed reforms. Under these institutional constraints, enabling regulation reflects a second best approach in which agencies reduce mechanism induced costs when revisiting the objective would introduce delay and uncertainty and restricted participation imposes real social costs.
This paper develops the microeconomic foundations of enabling regulation and specifies the channels through which regulatory design affects decisions to enter and participate in regulated activity. The analysis focuses on how the structures of a regulatory regime interact with technological and administrative conditions to generate or reduce frictions. Scholarship in law, economics, and public administration has examined regulatory design, administrative burdens, and innovation oriented governance, but the channels through which regulatory interventions reduce frictions remain implicit. The contribution of this paper is to show how the operational mechanisms of a regulatory regime determine the cost structure actors face and, in turn, shape participation. Participation changes represent the first order response to shifts in this mechanism induced cost structure and therefore provide the earliest signal of whether alignment has been restored. This account clarifies how frictions accumulate, how they restrict participation, and how targeted interventions restore alignment.
The U.S. Department of Transportation (DOT) provides a natural setting for examining these dynamics. DOT’s regulatory regimes were developed for technological eras centered on crewed aviation, human‑operated motor vehicles, and conventional rail systems. As technologies and markets evolve, these regimes accumulate frictions that make misalignment visible. This paper examines three cases: the Federal Aviation Administration’s Part 107 rule for small unmanned aircraft systems, the Federal Railroad Administration’s Tier III passenger equipment standards, and the National Highway Traffic Safety Administration’s modernization of electronic odometer disclosures. The cases show how enabling regulation reduces frictions, clarifies compliance pathways, and shapes participation across diverse regulatory contexts. DOT’s regulatory diversity makes it an analytically rich environment for observing how reforms to the operational features of a regime perform across different technological and institutional settings and for assessing where this approach is most effectively applied.
This paper first reviews the literature on regulatory adaptation to identify the broad families of tools and institutional processes available for governing technological change. It then develops a conceptual framework grounded in a microeconomic model of participation in which compliance costs, administrative burdens, uncertainty, and information asymmetries shape decisions to enter and operate within a regulated market. The framework is applied to three DOT rules to show how misaligned regulatory structures generate distinct frictions and how targeted reforms reduce them. The paper then identifies the strategic instruments that generalize across the cases and draws implications for how regulatory structures can be aligned with contemporary technological and institutional conditions in ways that reduce frictions and support broader participation.
This project was made possible through the support of Grant 63641 from the John Templeton Foundation. The opinions expressed in this publication are those of the author(s) and do not necessarily reflect the views of the John Templeton Foundation. For more information, visit The Next Frontier: Rethinking Regulation in an Era of Rapid Innovation.