The Limits of Performance-Based Regulation

Performance-based regulation is widely heralded as a superior approach to regulation. Rather than specifying the actions regulated entities must take, performance-based regulation instead requires the attainment of outcomes and gives flexibility in how to meet them. Despite nearly universal acclaim for performance-based regulation, the reasons supporting its use remain largely theoretical and conjectural. Owing in part to a lack of a clear conceptual taxonomy, researchers have yet to produce much empirical research documenting the strengths and weaknesses of performance-based regulation. In this Article, I provide a much-needed conceptual framework for understanding and assessing performance-based regulation. After defining performance-based regulation and distinguishing it from other types of regulation, I also show that this kind of regulation can itself take many forms, depending on the specificity of required outcomes, the proximity of these outcomes to the regulatory goal, the way that performance is determined, the underlying basis for required outcomes, the characteristics of the targeted regulated entities, and the allocation of the burden of proving compliance. Variation along these dimensions can ultimately result in widely varying impacts of different regulations, which means that policy-makers cannot assume that every performance-based regulation will work the same. More importantly, this Article contributes a comprehensive consideration of the dangers of performance-based regulation, illustrating with real-world examples how this form of regulation can work poorly and even create its own problems, especially when performance cannot be adequately defined, measured, or monitored. In highlighting the dangers of performance-based regulation, I do not suggest that it should never be used; instead, I show that regulators must fully take into account the performance of performance-based regulation and not be swayed by intuitive claims suggesting this form of regulation is a panacea. Despite its theoretical advantages, performance-based regulation also possesses limitations which must be considered. Decision makers should carefully scrutinize both performance-based regulation and its alternatives, paying close attention to how each alternative will be enforced and seeking to anticipate unintended consequences.