Regulatory Risk and Firm Decision-making: Evidence from the Waters of the United States and US Farms

With Philip G. Hoxie.

Abstract

Federal regulatory changes often impose substantial costs on directly affected firms. This paper asks a more nuanced question: Does the regulatory process itself, including the threat of regulatory changes, also impose substantial costs? We leverage a proposed jurisdictional change to the Clean Water Act, which led to regulatory changes in some states and only regulatory risk in others, in tandem with variation in the share of cropland potentially affected by the jurisdictional change in each county. We estimate an exposure difference-in-differences design to measure the effects of regulatory exposure on the reservation price for farming, as measured by rents from the Conservation Reserve Program. Using a willingness-to-pay-style analysis, farms subject to regulatory risk experience costs that are about 60% as large as the costs associated with the regulatory change itself. Moreover, due to a provision in the Clean Water Act which exempts certain types of pollution that accompany “regular” farming, we see that the threat of future regulation acted as an incentive to expand cropland in advance of any changes. This eroded other policy goals, in this case establishing new farming practices at the expense of the preservation of certain types of conservation lands. A simple back of the envelope calculation suggests that after accounting for both regulatory risk and the direct cost of regulation, the Clean Water Rule had a total cost to farms of about $2.9 Billion (2022 USD) annually.