Are Risk Regulators Rational? Evidence from Hazardous Waste Cleanup Decisions

A large literature in economics and social science focuses on how people reason about risks. Reactions of individuals to risk frequently depart from behavior predicted by full information variants of expected utility theory. Risk regulators are human and are subject to political pressures that are reflective of people's attitudes toward risk. As a result, the public policies they espouse may reflect errors in judgment about risk. Many biases stem from misperceptions of risk. Individuals overestimate small probabilities, overestimate the risks associated with highly publicized dangers, and have preferences over the manner (not just the magnitude) in which risks arise. Environmental risks associated with hazardous waste sites may be particularly prone to such errors since they involve small risks that are highly publicized. Indeed, the general public ranks hazardous waste sites as the leading environmental risk.' A growing literature also analyzes how the decisions of risk regulators depart from choices predicted in a standard benefit-cost framework. As Roger G. Noll and James E. Krier (1990) point out, since regulators are both human and political their decisions may reflect risk "biases." Regulators may exhibit these biases as individuals and because their constituents will express regulatory demands based on risk perceptions. Risk regulators may take into account the identity of the parties exposed to risk, the level of scrutiny by interest groups, the nature of congressional representation of affected constituents, and the degree of political activity by potentially exposed individuals.3 Errors in risk perceptions and risk decisions cause individuals to diverge from expected utility maximization. Similar errors by policy makers and the influence of risk politics cause regulators to diverge from social welfare maximization. This paper examines decisions made by federal and state regulators at hazardous waste sites addressed by the Superfund program to determine how their decisions diverge from those predicted by expected utility theory and benefitcost analysis. We analyze whether risk perceptions and politics influence two decisions central to the "how clean is clean" debate at Superfund sites-the selection of chemical cleanup targets and the expenditure of remediation funds at these contaminated sites. We also explore the interactive influence of risk-perception factors and political demands. Previous research on the regulation of chemical risks in standard setting indicates that decisions reflect evidence of risk biases and responsiveness to political factors. In assessing the determinants of the EPA's decision to cancel pesticide registration, Maureen L. Cropper et al. (1992) found that the EPA was more likely to cancel a pesticide in instances featuring higher risks to the maximally exposed individual user, lower benefits associated with continued use of the pesticide, higher values of intervention by environmental groups (mea* Viscusi: Harvard Law School, Harvard University, Cambridge, MA 02138; Hamilton: Sanford Institute of Public Policy, Duke University, Durham, NC 27708. We have benefited from the comments from two referees and the excellent research assistance of Jason Bell, Kristen Blann, Jahn Hakes, and Robert Malme. Research support was provided under Cooperative Agreement No. CR-823604-01 from the U.S. Environmental Protection Agency Office of Policy, Planning, and Evaluation. Dr. Alan Carlin and Dr. Suzanne Giannini-Spohn served as contract officers. All views (and errors) expressed are our own. l See U.S. Environmental Protection Agency (EPA) (1987) for a report on this survey evidence. 2 This theme is also articulated in Richard J. Zeckhauser and Viscusi (1990). Noll (1989) provides a more general assessment of the interaction between political concerns and regulatory policy, which is a central theme of this paper. 3Political factors have long played a prominent role in local hazardous waste policies. See, among others, Linda Cohen (1981), Howard Kunreuther and Douglas Easterling (1990, 1992), and Kunreuther and Rajeev Gowda (1990).