Distributionally-Weighted Cost Benefit Analysis: Welfare Economics Meets Organizational Design

Conventional approaches to cost benefit analysis, derived from social welfare maximization, suggest that it should ideally be adjusted to account for distributional effects. These approaches do not consider how tasks should be assigned within a large institution that includes specialized units such as the numerous agencies in the federal government. This paper considers how optimal distributive systems map onto the assignment of tasks to government agencies in such a system. It concludes that regulatory agencies should not, in general be asked to consider the distributive effects of regulations. The types of distributive adjustments that specialized regulatory agencies are able to make are not consistent with the types of distributive polices that are desirable. As a result, attempts to adjust cost-benefit analysis for distributive effects will likely be more expensive and less effective than other means of improving the distribution of resources. Instead, regulatory agencies, particularly those correcting market failures, should use cost-benefit analysis without taking distributive effects into account. † Walter J. Blum Professor, The University of Chicago Law School and Senior Fellow, The Computation Institute The University of Chicago and Argonne National Laboratories. I thank Louis Kaplow, Jonathan Masur, Jennifer Nou, and Eric Posner and participants at seminars at the University of Chicago and the American Law and Economics Association 2014 annual meeting for comments.