Post on 18-Dec-2015
Theories of Regulation
Lesson 5
Outline
Definition of Regulation
Process of Regulations
Regulatory Agency Employees
Theories of Regulation
Definition
Definition of Regulation “A government imposed limitation on the
behavior of individuals or organizations.”
President and legislature create regulations and the regulatory agencies
Regulatory agency enforces the limitation
Definition
Regulatory agencies are influenced by• Politicians
• Regulatory agency employees
• Firms
• Interest groups
Process of Regulation
Various groups in society strive for control or influence over regulatory agencies • Consumer groups – want lower prices
• Incumbent firms – want high stable profits • Also restrict international trade
• Also restrict labor unions
• Competitors – want more liberalized markets
Regulatory Agency Employees Careerist
• Wants agency to exist and grow • Careerist wants simple rules to avoid problems
Politician • Will leave agency for other office • Politician wants to please interest groups
Professional • Will move on to other work • Professionals want more complex rules
• Complex rules create demand for smarter professionals • Professionals are paid more
Theories of Regulation
Different theories explain the relationship between the public and regulatory agencies
Public Interest Theory Capture Theory Principal Agent View Parkinson’s Law
Public Interest Theory
Government creates a regulatory agency. • Government wants to correct a problem in a
market Example 1 - One firm, a monopoly,
controls a market, preventing market competition• Unregulated monopoly increases prices and
reduces output
• Gov. regulates monopoly
Public Interest Theory
Example 2 - Firms producing contaminated foods• Gov. regulates food, reducing food
contamination
Regulation increases “social welfare”• Improves society
Capture Theory
First variation• Firms in an industry has a demand for
regulation.
• Firms are friends with the regulatory agencies
• Regulatory agencies strongly influence the President and legislature
• Industry “captures” the government
Capture Theory
The industry controls the regulatory agencies. • Industry wants high prices and low output
• Industry wants to capture consumer surplus
Capture Theory
Second variation• Firms or an interest group capture the
regulatory agencies
United States• Politicians want to be re-elected to office
• Political campaigns costs millions of dollars
• Firms and interest groups contribute campaign funds
Capture Theory
Politicians write favorable laws for firms or interest groups
Regulatory agencies follow and enforce the laws
Principal Agent View
Government bureaucracies do not serve the purpose that they were created for
Regulatory agencies are concerned about maximizing their power, influence, and prestige
Agencies could be:• Dysfunctional
• Corrupt
Parkinson’s Law
C. Northcote Parkinson, British economist Noticed as the British Empire became
smaller, the number of employees in the Colonial Office increased• Less work means more workers???
• Note – Colonial Office administered the British Empire
Parkinson’s Law
Law - Government agencies expand over time• The expansion has no relationship to the amount of
work that needs to be done
• Regulatory agencies expand approximately 5% per year
A private firm expands a business to expand sales, services, or new products.• Expansion is profit driven
• Expansion means more work
Parkinson’s Law
Parkinson’s Law applies to many gov. agencies
Why? 1. “Expenditures rise to meet income”
• No matter the amount of government funding for a regulatory agency, the agency always spends the money.
• Gov. agencies want more and more funding!
Parkinson’s Law
2. “Work expands so as to fill the time available for its completion” • If a bureaucrat needs 4 hours to complete a
task and has an 8-hour work day, the bureaucrat will expand the task into 8 hours
Parkinson’s Law
3. Bureaucrats like “to multiply subordinates, not rivals” • A bureaucrat can elevate himself as manager
by hiring subordinates
• To hire subordinates, bureaucrats “create work for each other” • Expand paperwork and broaden regulations
• If bureaucrat hires a rival, then that rival also competes for a promotion
Parkinson’s Law
Thus, the size, scope, and mission of gov. increases each year
U.S. government agencies increase 5 to 10% per year
Conclusion
My opinion
Public Interest View dominates for new or re-structured regulatory agencies
Capture Theory, Principal Agent View, and Parkinson Law start to dominate over time as regulatory agency matures
References
I have the Economist article
1. Parkinson, C. Northcote. 1957. Parkinson's Law. Cambridge and Massachusetts: The Riverside Press
2. Parkinson, C. Northcote. November 1955. "Parkinson's Law." The Economist