How Performance Standards Create Smarter Regulations than Design Mandates
By Mark Febrizio & Patrick McLaughlin
While much discussion of federal rulemaking focuses on whether to regulate, let’s not forget that the actual design of new rules can be equally important. Agencies often seek to establish standards that improve public safety and govern best practices for high-risk industries. However, there are multiple ways to go about setting standards via regulation. A comparison of two of the best-known approaches — performance standards and design standards — illustrates why performance standards that promote innovation and permit flexibility should be preferred to their more restrictive cousin, design standards. In the bigger picture, prioritizing the use of performance standards over design standards can advance the implementation of sound regulatory analysis and help improve regulatory decision-making.
Performance Standards and Regulatory Planning
The federal government has taken an active interest in ensuring that regulations are crafted in effective ways, particularly through Executive Orders (EO) related to Regulatory Planning and Review. As a component of regulatory planning, the principles of regulation are valuable guideposts to assess (1) whether regulation is the right course of action and (2) if a potential rule is designed to maximize the chances of realizing beneficial outcomes and to reduce unanticipated negative consequences.
Prioritizing performance-based regulation is an essential principle contained in EO 12866, issued by the Clinton administration back in 1993:
Each agency shall identify and assess alternative forms of regulation and shall, to the extent feasible, specify performance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt.
In 2011, the Obama administration issued EO 13563, which reaffirmed EO 12866 and the commitment to performance objectives instead of design mandates.
These presidential directives have established important precedents for sound regulatory analysis, especially related to essential steps like defining the systemic problem and analyzing multiple alternatives. And it’s no accident that these presidents pointed to performance standards as preferable to design standards. Performance standards avoid many of the pitfalls often associated with regulations in general, such as locking in a specific technology when others would be better suited for the job. Regulators can’t guess what technologies or innovations will arise in a given sector, which is one of the principle reasons that in a comparison of performance and design standards, performance standards come out on top.
Comparing Performance and Design Standards
While it’s possible for performance and design standards to arrive at the same result, what matters is how they get there and how well they accommodate innovation and adaptation to unanticipated future conditions.
Performance standards create goals, or “performance objectives,” that individuals or firms must meet, typically based on how well technologies or equipment perform in achieving a desired outcome. The methods of compliance are flexible and results-oriented — a performance standard requires meeting the objective rather than specifying how parties arrive at a solution. They are usually associated with in-depth research and testing into what would be a viable standard that is economically feasible. The level of stringency is typically balanced with practicality.
Conversely, design standards select a specific technology (or offer a choice among a set of technologies) with the intention of standardizing better safety or performance. Put differently, design standards rely on a prescriptive approach to regulation that focuses on engineering inputs of production (such as requiring a specific design of transportation equipment that is intended to improve passenger safety) rather than achieving the desired outcomes (such as improving passenger safety, as measured in fatality or injury rates, by some specific percentage). The prescriptive approach is less flexible because it requires a specific method of compliance rather than allowing competition and innovation among countermeasures. While design standards can be somewhat flexible by offering a wide range of evaluated technologies, regulators often find it easier to adopt a single design standard — especially when that design is being promoted by a trade association.
The simple summary below displays how regulators can offer flexible, adaptable compliance options through well-crafted performance standards:
Furthermore, tying a rulemaking to a performance objective rather than a design mandate allows manufacturers to adapt more easily to technological advancement and long-term industry trends. For example, modifying a previous performance standard may be more predictable and conducive to long-term industry planning than trying to keep up with technological change by mandating a new design every five years. As experts from Harvard’s Regulatory Policy Program explained, performance-based regulation seeks “to achieve the same results as other standards, while giving firms the flexibility to achieve those results in the most cost-effective way they can find.” Since regulation is often burdensome to individuals and businesses, a goal-oriented approach is adaptive to the unique conditions faced by those affected.
Additionally, performance standards encourage innovation and unique problem-solving that regulators would be less alert to than the “man-on-the-spot” or industry experts. Regulators should be open to new methods of meeting safety standards rather than being restricted to existing options — a problem that’s exacerbated as regulations age. This results-oriented approach can mitigate government favoritism by allowing new markets to arise to meet safety demands instead of codifying the use of a particular design or product. In other words, a performance-based approach encourages competitive and contestable responses by numerous actors, even though the same objective of higher safety is mandated.
How Well Do Performance Standards Perform?
Of course, like all regulatory approaches, performance-based regulation isn’t perfect. In fact, there’s a wide array of literature discussing some of its pitfalls, such as accountability problems if the right verification and evaluation mechanisms aren’t in place.
Relatedly, measurement challenges can hinder the workability of a performance standard. As University of Washington professor Peter May notes, performance-based regulation won’t function as intended if certain factors cause an “inability to prescribe measurable goals and standards.” Furthermore, if performance standards are so stringent that they make innovative or adaptive approaches irrelevant, then they are in effect “technology-forcing” and offer no real difference from explicit design standards.
On the other hand, both accountability and measurement problems can be true for other regulatory approaches, and in both cases, technological advances can help mitigate them. For instance, sensors that measure the content of food can be wielded by an individual with a smartphone, and big data makes it increasingly feasible to “crowd-source” measurement.
What these limitations truly highlight is the importance of properly conducting ex ante and ex post regulatory analysis. Opting for goal-oriented approaches rather than prescriptive design mandates is only a component of the analytic process. If regulators don’t actively seek to establish proper accountability and measurement practices, collect data, evaluate alternatives, and review past rulemakings, then a performance standard — or any other type of standard — is unlikely to make a difference by itself.
Ultimately, regulatory analysis is important because it informs the design of the regulation itself and facilitates the use of best practices in a very common governmental function. Regulatory analysis also helps lawmakers and regulators think through the incentives and consequences of their actions. When used effectively, performance-based regulation is a vital tool because it focuses on the true objectives of a rule and encourages innovative and varied methods to meet those ends. And since we’re talking about the future, some of these innovative approaches to compliance could work even better than expected (i.e., exceed the goals set by the regulation) and surpass any design that could be imagined at the time of crafting the rule.
Mark Febrizio is an MA Fellow at the Mercatus Center at George Mason University. Patrick McLaughlin is a Senior Research Fellow at the Mercatus Center at George Mason University.
