How and When Regulators Should Intervene

TIFHow and WhenRegulators Should InterveneSY LANIE- AIHC ANI ALAY FCL YN I FEEHUARY 2C.:Sice: Ihe tise cof'tlie rmocletr1 Tegul:imry slille in the: 1970x, there: his Iee.T lIf regekitar apphy th?clelbsale: cvet how iagens:ies should regulale ind lcw legisl:ulive bxhliexslicHilel canclcl Tegul:alTy (iversigl1. Cr wlial bxlsis sliculel reglinrrregerde? of'eithe: inesragencies, Parlicularly agene:ies designel 1 prlecl ceinsues, le juslged?!nt ber, the igtr 2Sre innontian.Clearlr. o..e standard '-as been rhether or not they s.dequarely ororecr cuisremers fromunfair, deceprive, or fiaudr.leut praetices, soueching UT.5, sederal financial regr.lacot7agencies failed riiserab.y ar in the 2UoUs. Another srandard thar many mclerates andceiservarivea hsve advoce.red i: the applicarionl of cosr-benetit standards to regulsrory niles.kleally, regulatior. sloulei creat a syarem et'inc-cives to promot desirable behavior anddisincenrives to discourage undesirable behavior in the markerplace ar.d do so in a vsy thatlimirs ompliance costs. However, s the econormy has becone rnore innovation- based.ritere has heen considerably less fexus on how regulatory aselcies can borh protectconsumers atid avid as m.ch as possisle underrniningr incentives for irunovanonGetring regulation right when ir cotnes to inunovation- basec: bisiness aesiv:cies is cricicallhesuse innoranon is nreasingly rne xoue f naional cuiperrire advantags anclacononis: growrh.T'he schallenge fior a natior's regulatory sy+err stens fron che faut thar 'rnovarioni y irsery nature 1wolres -isles anl mista'ces—the ven: chings regulatus 'nhereritly warit tr>avrid, Anl yet trorn & sucieral espextive thg"g is a signihirart literer,r serween rrnisralkesrhg harri onsumers cue to ns'eticemue, neg ige"te. wiltul neglect; or ineptir.le or theFart af rhr. rxorripany amd those thzt ham conserners s a :ompany strives tu crezteinnranns thar benehr su;iety, 1.ikev;ige, there hunkl be a alisnutior ewern a:sumany's aci'ms ilet vielate rrguls.ion, aml ear: se li n-t l txrsrrner. (or txrjelirg)anl ones thzt :zusr litrle ror ne harm. if rrgilarors apply the sane kincd bl.nk:ss pealrie.iml reintxli+s rgaril-st sf either intel or hant, ilie reull will Ie les in-sivalien.PIGE 1 Imuset' is alal riak, anl ifincal.cors lixr iluy wil h? [suielxl lin : ty 'slakefintluling ilheise :flen nacle: Lby ril-level ergirs ut. guing -lxonl ilheir inshe cd t-s3.4 ar: s] n A 1 (8ms a -h:w! ?Its *:lo* I.h: Iexl : w alir-g.R:gulanions cin have t 1y[x tof u-inletlel coseijees: I hey cin Iskxk xnelici:linnov:lions if they ate Ino burdentome, und thcy can sil wo ghald :gaizs heallfulinnor:linns if hey iale IKu> Laa. Kegul:loly agrncies tfien fixcus nn minimizing ihe lau?since this lype of mis:kc mas che igency lonk ineffeclive :nd capos2s i. lo plhlich:2sl:sl. I-o1 cailmple. ihe L:.S. I-edei:l 1)rug idiminisizalion :113A: doe n1 an. L> gelczught approwing an unsafe drug, 1 owever, agencies ce Less aresure [o avniduniziention lly greventing halanles innoentions thet proeide socical benefit becaus: thco.apxorunigy co=Ei are diffic alt to recoguiz or mcasu.s. Likawise. wh th pece of markstzhange s slow and incern:tinnal competitios is minimal, ic cosis lircle [o overegul:te En way char inhibirs innewacion. I lowrever, wlhz.. the level ofF innovatio.. .d icernarioualcompetitio. increass, as ir hzs over che last fes decaics. the cost of overrcgul icionincrcascs considerably.Whil: rli2 regularory fianearor: d.crelopec. here applies to mot rcgr.lasoly agencis; thisreporr will Focus o.. how tli: U.S. Tederal Tr:de .emrisiou (TTC) iis, or shou'd have.1pplicil its rggilaor oversighr in varicous cases invo'ving tecl corupalties erhosc productsor acricca go chrough iapid cyclca o change. This :sporr offera a crpo.ogr cli: rcgulacoracall ise whell evalusrilig rhich infiracriolls shorld be pr.raued basedl o. rwo dlinelaons-wlecher that con.pay aced i:rentiolially cr ieeligeltly and wliecher 1 copa': actionca.usec. rea. consimner harm. This proposed frs.ineworlc reilecrs a aliding ecale based on thesscrireria, wri.ere unintentior.il and har:uless icrions celicit the sallest pellry alid inrentiolaland hartiful scrions elieir the largesr. Penalcies shorld cherefore be clesigned to ellcouragecempanies to :aisce aure they c.o not ilFilly comnit infracciens or impose real har.u ollusers. This ca provide a mcxlel fer when and how the FTC should exersise is discrerionre intervene when copanies cemrir infr.csions.IntentNoYes[ NoNo PenaltyModest PenaltyHarmL YesModestPenaltyLarge PenaltyFigure 1: Recommended level of regulatory penalty based on harm and intentPAGF 2 I hi, rexl will: 4plo: l: clinenious : lhari anc: imenl, usiug lhis 1yushg ila al guil:fist allkncting Pen:lies i-gans. citni[ranies. I fu.ht tlnTzs hat. Le nf 2 haly shouidl 's.minisllxd i L: h 'thea foul cixsli.s.'lis Irn: of lexill:yslan i" xkilly sirike a l:lar:ce bcuezen Moleclng cnnsuef ind eeuring thal Hnereisalil, harsh[icnalizs sls Imsl at:l ax :; dieinxntiv