The Standard Cost
Model
A Critical Appraisal
Wolfgang Weigel
Associate Professor and Chair:The Joseph von Sonnenfels
Center for the Study of Public Law and Economics at the
Department of Economics, University of Vienna
E-mail: Wolfgang.Weigel@univie.ac.at
Web: http://www.univie.ac.at/Sonnenfels
The Standard Cost Model…
Contents
 Scope of the paper and background:
„Less and better regulation“
 The Standard Cost Model (SCM): What
it is about
 SCM summarized
 SCM Results illustrated
 Problems with SCM
 A summary view on findings
 Conclusions
Scope and background:
 „Less and better regulation“ is a catch phrase in both the




OECD (Organization for Economic Cooperation and
Development) and the EU
Its goals are most prominently reflected in the attemps to
install RIA
Many look at regulation as giving rise to excessive
bureaucracy and exploitation through state power…
However, one must not forgest that regulation at the
same time serves a certain purpose in the presence of
market failures
Tools such as SCM, which are widely cheered upon
appearance, mainly are focussing on the cost of
regulation only. They are presumed to be a quick and
effective tool for cutting „red tape“
The Standard Cost Model –
what is it about?
 SCM aims at identifying, measuring and
assessing the cost accruing to businesses
when complying with administrative demands –
„administrative burdens“
 Once the cost are known reductions can be
sought (the rationale being the potential
increase in output, employment, and growth →
see The World Bank: „Doing business in 2005 removing obstacles to growth“, and other
sources)
 A good thing! So: Why bother?
 To see this, the SCM first needs to be
explained
The Standard Cost Model
summarized
Chart 1
The Costs of Regulation to Businesses
Direct financial
cost (e.g.taxes)
Compliance costs
Substantive
compliance
costs (e.g.
installing filters)
Long-term
structural costs
Administrative
costs
(e.g.obligatory
reports to the
government)
Chart 2
Overall administrative costs
Business
administration
costs
Administrative costs from central
government or EU regulation
Admin. Activities
which would
continue even if
regulation were
removed (e.g. trust
enhancing
information for
consumers)
Administrative
burdens (activities
which are
conducted by
businesses
because there are
obligations to
information)
Chart 3
Legal norm (listed as accruing at each ministry)
Identification of obligation to provide information in
each law
Finding the data (experts and council)
Identify the administrative activities
Time X wage-rate + one-time outlay
Cost per andmin activity: P
No of firms X frequency of info
Number of activities: Q
Cost of administrative burdens = P X Q
The Standard Cost Model –
Results illustrated
 Austria: Survey of 2007: Legal norms: 561,
information obligations: 5687, total burden: €
4,3 Billion (1,66% of nominal GDP)
 Compared to UK: 1,5% of GDP, Denmark:1,9%
of GDP, Netherlands: 3,7% of GDP, USA: 1%
of GNP (estimate) – Source: World Bank
 Goal: Cut by 25% until 2010 for national law,
2012 for EU regulations
 Differences depend on in- or exclusion of
„business as usual costs“ (see chart 2)
The Standard Cost Model –
Problems 1
 There is an aggregate measure (€ 4,3 Billion)
 There is an aggregate goal ( -25 %)
 There is a derived goal such as a boost of GDP
by 1,5% and of labour productivity of 1,7%
(Source: OECD)
 But the goal can only be accomplished by
considering each act individually – that is by
utmost disagregation
 And (not only) the accomplishment of the
derived goal rests on strong and delicate
assumptions
The Standard Cost Model –
Problems 2
 Nowhere in the literature it is mentioned that obligations
to inform are a consequence of market failure – as is
regulation in general (a perfect world does not need
regulation)
 Only implicitly at least in the manuals and the literature it
is presumed that obligations to inform can be badly
designed, thus causing excessive burdens
 Only more recently there is awareness of the need to
have a look on costs (saved) and benefits (forgone) for
each of the obligations to information (See European
Commission „Impact Assessment Guidelines“ 2005
 Without that, there is little use of SCM for a more
comprehensive RIA
The Standard Cost Model –
Problems 3
 The problem with the understanding of obligations to
inform is that it is assumed that businesses comply to the
request. Strategic action is assumed away.
 One consequence is that SCM fails to comprise likely
„secondary cost of information“, which typically accrue to
consumers, when they doubt the information provided by
firms, so that they have to undergo efforts to find out
(think of fractions of genetically manipulated crop in
foodstuff)
 Succesful application if the SCM causes spillovers or
externalities e.g. by making advice from experts
superfluous. Thus value added will be alleviated
The Standard Cost Model –
Problems 4
 When it comes to the calculation of the cost af an
administrative activity, only „normally efficient firms“ are
considered
 To illustrate: When one firm reports 5 Minutes for an
activity, the host of firms between 15 and 20 minutes, and
one firm 50 minutes then the first and last firm are
excluded as outlayers – without a check for the reasons
 However, it could well be that in one firm a non-skilled
worker and in the other an academic does the job
 To learn about the problems associated with
administrative burdens benchmarks should be adopted
instead of simplifying „nomally efficient firms“
The Standard Cost Model –
Problems 5
 Another tricky issue is that of the reference date and the
subseqent application of measures to cut administraitve
burdens
 One has to clarify what to do with new laws (include or
exclude), amended laws etc.
 And, even harder to accomplish, how to control for entries and
exits (bankruptcy) of firms
The Standard Cost Model –
Problems 6
 A word must be said about the expected gains
 Analysts favouring SCM seem not to be aware of x-
inefficiencies
 Lowering the administrative burden does not
automatically leave resources for additional output, when
the firm is not producing at the production possibility
frontier
 Lowering the administrative burden can even lead to the
dismissal of employees, thus not increasing but even
decreasing the economy‘s value added
 And finally: Some information by firms may be e.g. trustenhancing. Thus it is meant to push sales. And in that
case it is not an administrative cost in the narrow sense,
but a production cost…
The Standard Cost Model –
Findings

Administrative burdens exist for at least two different
reasons
 It is „market failure“, which give rise to strategic action,
which in turn call for regulation inclusive of obligations to
inform
 True regulatory activities can cause excessive
bureaucracy and other types of „government failure“

So there are costs and benefits
Where the situation is further complicated by the fact
that regulation ranges from outright prohibition to
deterrents and incentives
The Standard Cost Model –
Findings
 The assumptions of the SCM violate standard
assumptions of economics (according to the Austrian
Manual of SCM „eterprises are compliant and public
administration acts according to the rules“ (!)
 The possibiltiy to exactly measure administraitve burdens
has eventually be doubted by experts (The Austrian
Statistical Office publishes a barometer of stress and
strain, in which they shy away from monetary measures
and confine them to time consumed, because „ …the
neglect of differences in the qualification of processors
will make the valuation in money terms very
problematical“)
 Upon investigation in books on accounting accounting for
administrative costs in firms is rather unusual – thus of
little help
The Standard Cost Model –
Conclusion
 While economies evidently suffer from red tape




immediate measures (or even cures) are rare
SCM is an ambitious and perfecty understandable
attempt to fill a gap
However, as hopefully has been shown in the paper, it
can be dangerous to follow the temptation of simplicity
It might have been worthwhile to spend the efforts in the
further development if RIA
It could well be that a more advanced SCM can be
helpful, but this should be explored by a pilot study, which
allows for the consideration of some of the points made in
this critical assessment