It’s not the (government’s) thought that counts

Good intentions are not enough to create an effective regulation. An executive agency, Congress, or the White House can have the best intentions in the world, but if they are not effectively executed, the resulting statute or regulation can have adverse consequences for the public. In the worst cases, the resulting legislation can produce the exact opposite of what its authors intended. This concept is what my colleague, Soriya Chhe, and I have dubbed the Protection Paradox: well-intentioned government interventions create structural barriers that entrench incumbents and hurt the public by squeezing out smaller competitors. Businesses are harmed in this process, but consumers ultimately get the short end of the stick as they are left with fewer options, less innovation, and potentially higher prices.

Take, for instance, OSHA’s regulations surrounding Mobile Elevating Work Platforms (MEWPs). MEWPs are commonly used on construction sites and allow workers to complete projects at significant heights. Because these machines present serious safety risks, the Occupational Safety and Health Administration (OSHA) has established standards governing their use and modification. Under 29 C.F.R. §§ 1926.453 and 1910.67, field modifications must be certified in writing as safe by the equipment’s original manufacturer or an equivalent entity. The requirement serves an obvious purpose: modifications can affect a machine’s stability and structural integrity, and workers should not be exposed to unsafe equipment.

The problem is what happens when the manufacturer does not provide that certification. Small business innovators interviewed for our paper reported delays or non-responsiveness from original equipment manufacturers (OEMs). The regulations provide no deadline for a response, no requirement that an OEM explain a denial, and no meaningful process for challenging inaction. The alternative — certification by an “equivalent entity” — can require extensive and costly engineering analysis and testing. For a small innovator, those costs can make these certifications economically unrealistic.

Another more nuanced example is found in the Securities and Exchange Commission’s (SEC) enforcement proceedings. The SEC was created by Congress to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. However, some of its enforcement rules can create barriers that have consequences beyond their intended purpose. To accomplish its mission, the SEC has broad enforcement authority and substantial institutional advantages over the individuals and businesses it investigates. The agency has specialized attorneys, investigators, institutional knowledge, and the resources to spread enforcement costs across hundreds of cases. A small business facing an SEC investigation has none of those advantages. It must individually bear the expenses of attorneys, experts, and document production, often while it is already under financial strain. These small business owners face substantial pressure to settle rather than litigate meritorious defenses, and this can discourage smaller participants from entering or remaining in regulated markets.

This paradox goes beyond OSHA and the SEC and can emerge anywhere in the federal regulatory system. Our paper identifies five features that can help policy makers recognize conditions in which the Protection Paradox may arise. These include:

1. A legitimate government objective;

2. Discretionary authority becomes concentrated;

3. Structural barriers to participation emerge;

4. Competition and innovation decline; and

5. The intended beneficiaries bear the costs.

The lesson is not that regulation is inherently harmful or that government should abandon legitimate protections. Rather, regulators should consider not only whether a rule advances its immediate objective, but also whether the way it is designed creates barriers that protect incumbents, discourage innovation, or ultimately leave consumers worse off. Good intentions matter, but they are no substitute for effective regulation.