The Limits of Irrationality as a Rationale for Regulation

Journal of Policy Analysis and Management

May 13, 2015

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Abstract

"If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself." – Federalist 51

James Madison was speaking of the structural checks on governmental power when he wrote those words, but it is worth recalling his advice when we contemplate the role of benefit-cost analysis as a check on the unconstrained exercise of the government's regulatory powers, and the implications of the reality that people's behavior, both in and out of government, sometimes falls short of what we might incorporate into an economic model or hope for in a perfect world.