Roger G. Noll. 1989. Economic Perspectives on the Politics of Regulation

Roger G. Noll. "Economics Perspectives on the Politics of Regulation," In R.D. Willig and R. Schmalensee, eds. Handbook of Industrial Organization, Vol. 2, North-Holland (1989): 1254-1287.

This chapter surveys the research on the political causes of regulatory policy.

Public interest theory - the view that, as a matter of positive theory, the normative goal of curing market failures animates the choice of regulatory policies.

• Assumptions:
1. Regulation is adopted only in the presence of genuine market failure
2. At the time, regulation is the best available policy instrument
3. Regulation does not persist once it begins to impose costs greater than the efficiency gained.
• How regulation can act to the benefit of the public:
1. Government regulation corrects market failures. 
2. Information pertinent to identifying market failures is most cheaply acquired and disseminated by government. 
3. Governments may be able to correct market failures with lower transaction costs than direct negotiation between producers and sufferers. 

Agency relationships mediate the relationship between the policy preferences of citizens and the policy outcomes pursued by agencies.

• The degree to which agents comply with the preferences of principals depends on: 
1. The extent to which principals and agents have conflicts of interest
2. Tthe costs and accuracy of methods for principals to monitor the performance of agents
3. The power of the principals; enforcement mechanisms for redirecting the incentives of the agent. 
• If a single interest group is effectively organized, the result is Stigler's simple "capture"—the one organized group will tend to be monopoly or cartel that is protected by regulators. 
• Theoretically, regulation will depart from efficiency only when it is necessary to create and divide rents among represented interest. Departure of regulation from efficiency is constrained by:
1. Political entrepreneurs who can effectively pay the organization costs of an unrepresented group.
2. Technological change and rising incomes that can cause previously unrepresented interests to eventually have sufficient stakes in a particular domain of regulation to become represented in it.
• Difficulties in controlling the behavior of regulatory agencies: 
1. Agencies can engage in shirking
2. Agency officials may have their own political agenda 
3. Agency personnel may b motivated by personal career objectives 
4. Agencies may be populated by professionals who have a narrow or uninformed perception of how to achieve public interest objectives.

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.