Sunday, May 22, 2011

W. Kip Viscusi, John M. Vernon, Joseph E. Harrington, Jr. 2000. Introduction to Economic Regulation

W. Kip Viscusi, John M. Vernon, Joseph E. Harrington, Jr. "Introduction to Economic Regulation," in W. Kip Viscusi, John M. Vernon, and Joseph E. Harrington, Jr. Economics of Regulation and Antitrust, 3rd ed. (Cambridge, MA: MIT Press, 2000), pg. 297-336

Regulation - a state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by threat of sanction.

Variables controlled by regulation:
  1. Price
    • Imposition of a single price
    • Specification of a price structure
  2. Quantity
    • With price regulation
    • Without price regulation
  3. Number of Firms
    • Restrictions on entry and exit
  4. Quality
  5. Firm investment

Theory of Regulation - why is there regulation? / Hypotheses about empirical regularities 
  1. Public Interest Theory - also known as normative analysis as a positive theory (NPT) - government regulates to correct market failures.
    • Inconsistent with empirical evidence where firms supported or lobbied for regulation and where industries are regulated despite lack of market failure.
  2. Capture Theory - the agency that should be regulating the industry is "captured" by it, instead, so regulation promotes industry profits rather than social welfare.
    • Does not explain regulation not supported by firms.
    • Performs better at explaining the timing of deregulation bank branching restrictions in the banking industry than NPT.
  3. Economic Theory of Regulation - interest groups control regulation. 
    • Stigler/Peltzman model: legislators balance desires of the interest groups and consumers to determine appropriate action.
      1. Regulatory legislation redistributes wealth.
      2. The behavior of legislators is driven by their desire to remain in office, so legislation is designed to maximize political support. 
      3. Interest groups compete by offering political support in exchange for favorable legislation.
    • Becker model: regulation is used to increase the welfare of more influential groups. Those who stand to gain the most and who suffer the least from free rider issues hold the most sway.

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