Regulation and Regulatory Agencies

Regulation has been defined broadly as the intentional restriction of a subject’s choice of

activity, by an entity not directly party to or involved in that activity. In its most familiar form,

regulation concerns restrictions placed by government on activities in the private sector

(although government may also regulate itself). Normally, government acts as an agent for its

citizens, and, as such, is obligated to give account of its actions. Hence, regulation, as well as

other government actions, are normally accompanied by a formal rationale, though the content of

the rationale may range from substantive to purely symbolic in character. There are many

possible forms for this rationale, but it is generally given the label of “the public interest.”

Hence, regulation can be defined more narrowly as the public administrative policing of a

private activity with respect to a rule prescribed in the public interest.

As discussed later in this article, regulation that is formally rationalized as in the public

interest may in fact be the result of a societal group obtaining government protection that steers

benefits to the members of the group. Thus, the existence of a public interest rationale for

regulation does not necessarily mean that the primary actual purpose of the regulation is to

provide general public benefit. Government regulation can be a valuable prize that reduces

competition, guarantees enhanced incomes, discriminates against open participation in activities,

and so on. Indeed, one of the classic reasons for the existence of government is to provide a

legitimate mechanism for the coercive resolution of disputes. Whoever can harness that coercion

to serve particular economic and social ends can reap enormous windfalls.

Regulation is traditionally divided into economic and social regulation. Economic

regulation includes the regulation of market transactions, restrictions on the behaviors of firms

and on the behaviors of individuals within firms and markets, regulations on financial and trade

practices in particular industries and in commerce at all levels, including international trade, and

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so on. Social regulation is concerned with the impacts of economic and social practices on

people and on the natural environment; it is sometimes labeled “protective” regulation. Such

regulation can be aimed at reducing pollution, protecting consumers from physical harm from the

use of consumer products, ensuring the safety of drugs, keeping the workplace safe, assuring

safety in the performance of motor vehicles, eliminating discrimination in employment on such

grounds as gender, race, age, and disability, and so on.

There are several standard rationales for regulation in the political economy literature.

For economic regulation, these include, among others, the control of cutthroat competition

(selling below cost) and other forms of “unfair competition;” the control of monopoly power,

especially that arising from so-called “natural monopolies;” the existence of unequal bargaining

power and of excessive transaction costs in markets; and the control of economic rents, in which

firms possess cost advantages over what prevails in the market by being able to exploit their

control of local supply due to technological, legal, situational, or other factors. For social

regulation, these rationales include the control of externalities, the unintended byproducts of

market activities, such as pollution; information, incentive, or public goods problems that are

judged to require re-balancing interventions by government; and other public policy concerns

where the market works but produces outcomes that are socially unacceptable.

Regulation is a function of governments at all levels, from local to national (and even

international). This article will focus on regulation in the United States, with an emphasis on the

federal level.

Origins of Regulation

Quite apart from regulation that is sought to benefit narrow private interests, more broadly

based regulation is rarely enacted with deliberative foresight. At least with respect to the

development of regulation in the U.S., policy makers tend not to act in a precautionary manner,

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reviewing the economic and social hazards that plague society, and developing government

interventions that aim to forestall or ameliorate the detected present or anticipated future hazards.

Instead, a number of factors work against such rational, calculative regulatory initiation, i.e.,

rationalized policy formulation and implementation of new regulation. Indeed, the most

important precursor to regulation has been a real or perceived crisis in the issue area. Advocacy

from a variety of pressure groups has influenced the origin and character of the regulation, taking

advantage of and/or creating the perception of crisis. The resulting pattern of regulatory origin in

the U.S. featured most economic regulation arriving decades before extensive social regulation.

Factors Affecting the Initiation and Implementation of Regulation

Factors that work against systematic planning in the initiation and early implementation of

regulation include, among others:

• The extent and character of current economic and social hazards, much less the course of future

events, may be poorly understood and initially unpredictable.

• Political consensus supporting regulation may be lacking, especially in the case in which those

who would pay the costs of regulatory compliance, such as industry, are aware of the potential

future economic impacts, are well-represented, and oppose the regulation effectively, and those

who would benefit are spread diffusely through the population and lack effective political agents

to secure regulatory protection (see the work of James Q. Wilson).

• There may be a technical incapacity to resolve the hazards, e.g., the knowledge to produce

nonpolluting engines.

• The prospective costs of regulation may deter adoption of the regulation. Regulation may be

perceived as costly to administer as well as costly to those who must comply with it, so that

resource availability issues may slow adoption, as well as engender opposition both from those

who must pay for compliance and those who must absorb the tax burden of administering the

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regulatory state. The Weidenbaum Center (Washington University) and the Mercatus Center

(George Mason University) jointly prepare an annual report of federal spending on regulatory

activities by agency and in aggregate. Although the report is perhaps overly inclusive about

which federal programs are regulatory and is based in center research programs that tend to be

critical of government regulation, the extensiveness and significant cost of regulatory programs

in the federal government is apparent.

• Whether or not regulation is approved, and the particular design of regulation and locus for its

administration can depend on the process of regulatory approval, the distribution of political

power, and the design of the institutions that manage such approval. For example, conflict in the

legislature may lead it to delegate the locus for choice of specific features of the regulation to the

regulatory body, where the mix of pressures from interests concerned about the regulation might

be different. And the legislature may wish to shift the burden for design of the regulation, as well

as the potential blame for the costs or other negative impacts from the regulation, to the

regulatory body. The gatekeeping role of legislative committee process can block or advance

regulatory legislation. There is now a growing literature on delegation, the creation of regulatory

agents, and the design of regulation, beginning with Barry Mitnick’s work and including such

scholars as Morris Fiorina, the trio of Mathew McCubbins, Roger Noll, & Barry Weingast,

Jonathan Macey, David Epstein & Sharyn O’Halloran, and others.

• The design of regulatory tools remains relatively poorly understood, so that the choice of

regulatory instrument can be far from systematic. The choice of regulatory means is often based

on the availability of traditional tools, such as directive standards, or the influence of political

directives to reduce regulatory impacts or serve special interests. Political mandates can filter

societal expressions of need for government intervention. Thus, issues with the design and

choice of regulation, as well as the design of the administrative process, can present challenges

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in ensuring that controls are adopted, and that they are effective and efficiently administered, as

well as provide due process opportunities for public participation. The treatment of regulatory

means as a matter of choice, rather than as predetermined in the form of traditional standards

regulation, was introduced largely by Allen Kneese and Charles Schulze with the comparison of

incentives to directives means. This evolved into the “tools” approach to the study of regulation,

as developed by Lester Salamon, Mel Dubnick, Christopher Hood, John Scholz, Barry Mitnick,

Stephen H. Linder & B. Guy Peters, Michael Howlett, and a number of others.

• There can be significant hurdles in implementation, i.e., in creating the regulatory system, and

in administering that system as an operating regulatory organization. These administrative

problems are made even more formidable by the need to operate regulatory controls across a

federal system in the U.S., i.e., to operate across federal, state, and local government settings.

The study of implementation as almost a subfield of political science has expanded since the

1970s. The early work of Jeffrey Pressman & Aaron Wildavsky was soon joined by that of a

number of scholars, including Daniel Mazmanian, Paul Sabatier, Laurence O’Toole, Kenneth

Meier, Keith Provan, Brint Milward, and many others. Implementation was treated as potentially

a highly problematic and often critical aspect of the initiation of any new public program,

including regulation.

• Finally, regulation can be opposed on normative or ideological grounds as a restriction on

private choice and on the uses of private property, no matter the distribution of costs and

benefits. In general, scholars such as Paul Quirk and Joseph Kalt & Mark Zupan have studied the

influences of ideology on changes in regulatory policy.

Crisis as the Precursor to Regulation

Thus, although industries may actively secure and defend regulation that benefits them,

much regulation does not occur unless there is widespread public pressure as the result of a

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perceived crisis. Such perceived crises may have a real basis generated by an attention-grabbing,

catastrophic and often tragic event. One such case was the sulfanilomide elixir poisonings in

1937, in which many of those who died were children. That incident led to the Food, Drug, and

Cosmetic Act of 1938, which required the U.S. Food and Drug Administration to determine that

drugs are both safe and effective before being allowed on the market.

The circumstances preceding regulation can be manipulated or brokered so that they are

perceived as a crisis, though there may be no single precipitating event. Thus, pressure from the

labor movement led to the creation of the Occupational Safety and Health Administration in

1970. There were indeed serious issues regarding the level of safety in the American workplace

as well as advocacy to ameliorate them for years, but there had been no single, galvanizing

event.

Although a crisis may be perceived, there may be no real basis for one. Or, if real, the

crisis’s purported solution may in actuality be a subsidy or protection for a particular interest or

company. Typically, firms seeking regulatory protection invent rationales claiming great public

need for the intervention, even though the public action that is proposed may actually raise costs

to the public or divert resources better used elsewhere. Firms may manage to define the public’s

perception of the crisis in such a way that the solution provides significant benefits to the

company. Via adroit use of political influence strategies, such firms can ensure implementation

of regulatory interventions that are superficially designed to resolve the crisis, but may produce

little general benefit other than enriching the firms. Thus, tax incentives to produce ethanol, plus

the seasonal mandate to use gasoline mixed with ethanol, were great benefits to Archer Daniels

Midland, which had sought the regulation. Some critics argued that there were better ways of

achieving essentially the same public ends.

Widespread, severe human harm, such as the sulfanilomide elixir poisonings, tends to be

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the most effective generator of crisis. The crisis levels political divisions and makes legislative

action mandatory. But such crisis is not predictable, of course, and, besides producing such

reactions as outrage or widespread horror, acts as a kind of social surprise. Hence, reform with

the creation of new or more stringent regulation staggers forward unpredictably after recurrent

crises, rather than after rational steps to prevent harm.

The Role of Pressure Groups in Regulatory Origin

By generating widespread social and political support for public action, the social

perception of crisis provides the opportunity for groups to push policy agendas featuring

regulation. In general, regulation can be created in response to pressures from a variety of

sources, including consumers desiring protection, industry desiring competitive protection and

special advantages, the bureaucrats themselves as a means to extend or defend the bureaucracy

or to rationalize existing regulation, and/or legislative or bureaucratic actors as a good faith effort

undertaken in a particular, but authentically held, view of the public interest.

As an example of “public interest” regulation, consider Ann Friedlander’s arguments

regarding value-of-service pricing regulation by the Interstate Commerce Commission.

Beginning in the ICC’s early years, value-of-service pricing appeared originally to be aimed at

subsidizing the development of the American West, and, hence, promoting economic

development in the U.S. Under value-of-service pricing, so-called higher-valued goods, such as

manufactures, were subject to higher shipping rates than lower-valued goods, such as bulk

commodities. Because the developing West produced lower-valued goods, this form of

discriminatory pricing in effect subsidized development in that region. But value-of-service

pricing lingered as official regulatory policy long after Western development ceased to be a

national goal, and was for decades supported in Congress and the ICC by those whom it

benefited. Indeed, scholars have found strong evidence that regional differences, including

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regional competition reflecting differential potential impacts of regulation, frequently shape

regulatory designs and implementation (see, for example, historical studies by Thomas W.

Gilligan, William J. Marshall, & Barry R. Weingast, Richard Bensel, and Elizabeth Sanders).

Thus, whether or not the initiation of the regulatory policy had an authentic public interest basis,

history suggests that groups, including those with a regional basis, have interpreted the

regulation in the light of their self-interest and pursued and defended it chiefly on those grounds.

Historical Pattern of Regulatory Origin

Most economic regulation predated social regulation in the U.S. With a few exceptions (for

example, antitrust regulation in the 1903 Antitrust Division of what became the Department of

Justice), the model of the Interstate Commerce Commission (see below) was replicated in other

regulatory contexts: the Federal Reserve Board in 1913, the Federal Trade Commission (FTC) in

1914, the Shipping Board (later the Federal Maritime Commission) in 1916, the Tariff

Commission in 1916 (becoming the International Trade Commission in 1975), the Federal Water

Power Commission in 1920 (becoming the Federal Power Commission (FPC) in 1930 and the

Federal Energy Regulatory Commission (FERC) in 1977), the Federal Radio Commission in

1927 (becoming the Federal Communications Commission (FCC) in 1934), the Securities and

Exchange Commission (SEC) in 1934, the National Labor Relations Board (NLRB) in 1935, the

Civil Aeronautics Board (CAB) in 1938 (beginning as the Civil Aeronautics Authority), and the

Atomic Energy Commission in 1946 (becoming the Nuclear Regulatory Commission (NRC) in

1975).

Federal regulation was relentlessly mimetic, replicating earlier models. As noted below, the

rationale for those models was created largely post-hoc, but found widespread support and

defense among the legal practitioners who populated the agencies. Regulation was seen as an

enterprise in the law, guided and defended by those schooled in the same tradition as those who

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practiced in the courts. In essence, despite being a delegation from the legislature, regulation in

the U.S. was perceived as an appendage of the legal system and its practitioners. A few social

regulatory agencies, mostly in the single-headed agency rather than multi-headed commission

structure, were established, including the Food and Drug Administration (FDA) in 1931

(developing from regulation going back to the Pure Food and Drug Act of 1906) and the Federal

Aviation Agency (later, Administration, or FAA) in 1948.

Beginning in the mid 1960s, new regulations were overwhelmingly social in character.

Some used the old independent commission form, but many were established as single-headed

agencies. The commission model was under increasing attack, and the new regulation was

sometimes seen as an urgent matter for executive branch policy making and implementation,

rather than as something to be investigated and adjudicated in an independent body. In other

words, social regulation was sometimes perceived as an enterprise directed at solving pressing

social problems, under the execution of the chief executive, rather than as the arbiter of disputes

and protections among industries that needed to be governed so as to approximate markets. The

new agencies were thus a mix of the old independent commission form and the single-headed

executive branch agency. For example, the Equal Employment Opportunity Commission

(EEOC) was established in 1964; the Environmental Protection Agency (EPA) in 1970; the

Consumer Product and Safety Commission (CPSC) in 1972; the Occupational Safety and Health

Administration (OSHA) in 1970; the Mine Enforcement and Safety Administration in 1973,

becoming the Mine Safety and Health Administration (MSHA) in 1977; the National

Transportation Safety Board (NTSB) in 1975; and the Office of Surface Mining Reclamation and

Enforcement (often referred to more simply as OSM) in 1977. The Commodity Futures Trading

Commission (CFTC) saw light in 1974 in a structure parallel to the 1934 SEC, evolving from

earlier economic regulation located in the executive branch.

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The Performance of Regulation

The performance of federal regulation has been criticized almost from its beginning, with

the Interstate Commerce Commission (ICC) in 1887. Many regulatory performance issues have

been rooted in the design of the agencies and their administrative practices, with the original

model being the ICC.

The Model of the Interstate Commerce Commission

The ICC took on the modern form of the independent regulatory commission, an entity

outside the hierarchical direction of executive branch agencies, in 1889. Early that year a lame

duck Congress and President Cleveland sought to put the ICC beyond the direct control of

incoming President Harrison, who was perceived as a “railroad lawyer” likely to weaken the new

agency’s authority. They passed legislation taking the agency outside the Department of the

Interior and making it an independent body. Subsequent legal scholarship sought to reify the

value of independence, which is supposed to keep agencies free of political meddling and ensure

that agencies develop and maintain the specialized expertise necessary to regulate effectively.

Many critics have observed that independence may have caused more problems with developing

consistent public policies than avoided partisan manipulations.

The ICC’s procedures were developed by its first chair, Judge Thomas Cooley, who

installed an adversarial, judicial-like system in the new agency. These procedures were intended

to give the new agency legitimacy, but in practice they led to long delays and significant costs

for those who sought to participate in the process. Sometimes those costs actually protected

regulated companies from challenges by acting as an entry barrier to companies seeking to enter

the industry. Because new entrants often brought cost-saving innovations to the industry, the

classic administrative process tended to act as a drag on innovation and efficiency in the

regulated industry. Later, the Administrative Procedure Act of 1946 and its amendments

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attempted to standardize the process across agencies, and succeeded in bringing some though not

complete uniformity across the federal government. But as the Cooley model spread across

federal regulatory bodies, so did its problematic characteristics.

Reliance in the U.S. on an adversarial administrative process mimics the practice of the

larger legal system derived from the English model. Such adversarialism stands in marked

contrast to the greater use of administrative tribunals in many other countries around the world,

including many in the European Union. In an administrative tribunal, a greater burden is placed

on the administrative judges to investigate and assemble the case, rather than sit back as arbiters

between the advocates representing the parties in the dispute or administrative judgment. One

consequence of the U.S. system is that the cases that are assembled via adversarial contest do not

necessarily reflect all interests relevant to a case, nor do they necessarily assemble all relevant

evidence. What is assembled is what is in the self-interest of the parties to the case to present, not

what should be reviewed in the wider aim of serving the public interest in regulation. There is a

nominal instruction in U.S. administrative procedure that encourages administrative judges to

play a more active role, but the common historical practice has been to allow the record to

assemble itself.

Regulatory agencies were set up as government in miniature. The agencies performed all

the functions of the larger government, but without the checks and balances of separation of

powers. Thus, regulatory agencies were administered by an executive (sometimes plural, as in

the independent commission), conducted the legislative function of rulemaking under delegation

from Congress, investigated infractions of those rules, adjudicated whether infractions occurred

and how rules should be applied to individuals and firms, conducted enforcement activities, set

general policies, and collected data/statistics on the industry. Critics charged that agencies that

functioned in this manner could not be truly impartial, and could not police themselves

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effectively by competition among their functional areas.

Rigidity and Capture in a Regulatory “Life Cycle”

Critics of regulation noted that, over time, many regulatory agencies reached

accommodations with the regulated industries. The agencies appeared to become supportive and

protective of the industry, rather than of the consumer and general public. In a classic analysis,

Marver Bernstein argued that independent regulatory commissions tended to follow a life cycle:

The regulatory commission emerges from a crisis that, in a compromise, resolves a group

struggle that may have lasted for decades. In its youth the agency is crusading and opposed by a

well-organized industry. The agency lacks experience in the area and has vague objectives and

untested legal powers. Its political supporters fade away, convinced the battle was won. In

maturity, the agency adjusts to the conflict it faces and begins to act as a manager or umpire for

the industry, rather than as a policeman. It relies on precedent, maintains good relations with the

industry, and soon develops a backlog of slow-moving cases. Bernstein notes that the agency

“becomes a captive of the regulated groups.” In its old age, the procedures of the agency become

sanctified and resistant to change. It acts as if it has a “working agreement” with the industry to

maintain the status quo. The agency’s staff declines in quality and the agency suffers from poor

management. It fails to keep up with societal change, and is generally recognized as a protector

of the industry. Congress becomes reluctant to fund what is perceived to be a poorly performing

agency. Should crisis recur in the industry, however, whether due to technological, competitive,

or other changes, new legislation, supported again by activist groups, can return the agency to its

youth. The cycle repeats. The life cycle model provides an attractive explanation for some very

recognizable behaviors in federal regulation, though a number of scholars, including Barry

Mitnick, Robert Chatov, Kenneth Meier & John Plumlee, and others, have analyzed Bernstein’s

arguments and found them more heuristic than descriptive.

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“Iron Triangles” Protect Industry

Critics of federal regulation observed that the close relationship that developed between

agency and industry was often embedded in a network of relationships among industry, the

agency, Congressional committees, and, later, citizen groups, the federal courts, and the

President. Because the public policy that emerged from the interaction of industry, agency, and

Congress tended to reliably favor the regulated industry, the trio was often referred to as the iron

triangle.

The iron triangle is built on a system of incentives operating among the particular

institutions of the federal government. In order to serve their districts and earn reelection,

legislators in the House and Senate seek to be members of committees of oversight for industries

important in their home districts. In order to encourage legislators to protect the industries via

helpful legislation (and obstruction of threatening bills), the industries take actions that generate

flows of campaign contributions as well as organize support and votes from those employed in or

dependent on the industry.

In return, legislators produce laws consistent with the interests of the industry and attempt

to influence the regulatory agency to bias its discretionary decisions toward the industry.

Legislators control agency budgets; the Senate passes on top-level agency appointments.

Uncooperative agency administrators can be publicly embarrassed at oversight hearings. Agency

heads are political appointees who, according to historical data, tend not to stay in their positions

for even the full term of their appointments. Looking ahead in their careers, these administrators

do not want their service in the agencies held up to public ridicule. In their jobs, they are

dependent on information from the regulated industry. Because the industry depends on

receiving favorable regulation, it treats regulators with the respect and attention that these

officials can get from nowhere else. Through repeated interaction, the regulators see industry

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managers as reasonable folks trying to do their jobs, rather than as subjects of federal regulation

whose compliance must be ensured. Thus, the industry can shape the perceptions of regulators

via information and interaction. Finally, when they leave their positions, agency heads often find

employment either in the regulated industry or in jobs dealing with the industry, e.g., in law

firms or lobbying groups specializing in the industry. This rotation of jobs among the actors in

the regulatory system is sometimes called the revolving door.

Because of this perverse distribution of incentives, mediated by legislators and/or received

directly, regulators tend to be responsive to the industry. In the extreme case the incentive system

leads to regulatory capture. Public policymaking in such regulatory systems thus displays the

stable outcomes of an iron triangle.

Although regulatory outcomes in some issue areas appear to benefit the regulated industry,

and there is abundant anecdotal evidence of many of the behaviors described above that appear

to lead to such outcomes, the behavioral and motivational logic of the iron triangle is relatively

simplistic. Many practicing regulators would claim that the logic either does not fully apply or is

incomplete as it applies to their industry contexts. For example, the classic logic ignores the

emergence of professionalism in the staffs of the regulatory agencies and how such

professionalism would modify agency outcomes (see, for example, work by Ted Greenwood,

John Mendeloff). Thus, one area for future academic research is whether iron triangles really

emerge in the fashion described (on influences on bureaucratic decision making, see, e.g., the

recent work by George Krause, Marc Eisner, Jeff Worsham, & Evan Ringquist, B. Dan Wood &

Richard W. Waterman, and Richard W. Waterman, Amelia A. Rouse, & Robert L. Wright).

Beginning in the late 1960s, increases in judicial activism along with the appearance of

citizen group activism on an organized scale never seen in Washington posed challenges to the

old iron triangles of regulation. Even the White House took occasional action to repair regulatory

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failures. The networks of federal policymaking in a number of areas of regulation became more

flexible, with outcomes that were no longer so consistently supportive of industry interests. With

six significant influential actors rather than three, regulatory policymaking looked more like a

jelly hexagon than an iron triangle.

The study of the creation and change of policy agendas (see, for example, the work of

Roger W. Cobb & Charles D. Elder, John Kingdon, and Frank R. Baumgartner & Bryan D.

Jones, among others), of networks of policymaking, often labeled policy subgovernments or

policy networks (see, for example, the work of Hugh Heclo, Edward O. Laumann & David

Knoke, among others) as well as the study of networks of policy implementation (see, for

example, the work of Keith Provan, Brint Milward, and others) has been expanding. These

approaches suggest that, quite apart from the rational choice or interest-based arguments that

seek to explain regulatory origin and regulatory design, path and institutional structure models

can offer a powerful descriptive theoretic alternative. Thus, such factors as the particular pattern

of decision control in the administrative process in the issue area; approval paths; government-

level – crossing effects, featuring control loss, policy redefinitions, control delays, and so on; and

arena effects as competition occurs among a limited set of elite groups within a particular set of

institutions; can individually or collectively shape regulatory origin, regulatory designs both

formal and in-practice, and, of course, regulatory performance (on the extreme case of regulation

as a random walk, see the work of David McCaffrey).

Recent Performance of Regulation and the Coming of Reform

A large number of studies in the 1970s and later, both by economists and by public interest

activists, established that federal regulation had performed poorly in a number of regulated

contexts. Agencies like the Civil Aeronautics Board (CAB) and the ICC had tended to protect

regulated companies from competition while raising costs for consumers and retarding

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innovation. In other cases, protections for consumers, those exposed to environmental pollution,

vehicle owners, patients treated with new drugs, and others, were criticized as poorly designed,

ineffective, and/or insufficient. These streams of criticism, together with the acceptance of new

ways of thinking about the design and performance of government, led both to efforts to

deregulate, chiefly in economic regulation, and efforts to increase or modify social regulation.

The rise of public interest activism spurred by the efforts of Ralph Nader, beginning in the late

1960s, led to support for new social regulation. Agencies such as the Environmental Protection

Agency, the Occupational Safety and Health Administration, and the Consumer Product Safety

Commission were established in the early 1970s. For the first time, major regulatory agencies

were terminated or replaced with much smaller entities (the CAB in 1978 and the ICC at the end

of 1995). As discussed later in this article, beginning with the Carter Administration, there were

experiments with new methods of regulation in some agencies.

Despite the problems noted above, social regulation has yielded very significant benefits in

the U.S. in the just over 30 years in which the major statutes have been in effect. Social

regulation has resulted in markedly cleaner air and water. Despite some early, conflicting

empirical studies, regulation appears to have had some effect in making the workplace safer. It

has caused firms to establish significant offices dealing with environment, health, and safety. In

many firms, this has translated to a serious and ongoing attention to compliance, with measurable

reductions in pollution and increases in employee safety. The development of professional

compliance bureaucracies with both a vested interest in the regulation and a high level of

professional expertise in designing and performing compliance led many firms to resist the de-

emphasis on regulatory compliance that characterized regulatory policy during the Reagan and

George W. Bush administrations (on response bureaucracies in the financial services industry

and elsewhere, see the work of David McCaffrey and his coauthors).

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Indeed, some large firms (for example, PPG in Pittsburgh, PA) participated in the

development of new regulation. Their expertise in regulatory design, and their knowledge of how

regulation affects their costs, permits them to help design regulation that may be less costly for

them in compliance than their smaller competitors. Large, multinational firms have participated

in negotiations leading to the establishment of voluntary international standards that make it

easier for such firms to do business overseas. Having a uniform standard across international

boundaries, even a fairly stringent one, is far less costly for business than adapting products to

the multiple standards of different country regulatory regimes. Meeting such international

standards can thus be a critical element in the ability to compete. And there can be significant

differences across international regulatory regimes. For example, regulation in the European

Union is more likely than the U.S. to be based on the “precautionary principle,” which places the

burden of proof of safety on those introducing a new technology. In the absence of such proof,

the technology is tightly restricted. Thus, sensitivity to, and the ability to adapt to as well as

shape international standards can be essential in being able to compete in many markets around

the world. Today’s patterns of corporate compliance tend to acknowledge such international

differences.

Some Business Complaints under Regulation

Among the most important factors shaping public agenda discussion over the creation,

design, and performance of regulation have been business complaints about the impacts of

regulation. Offered sometimes with guile as part of a contest over the definition of regulatory

issues and the design and/or implementation of pending regulation or regulatory reform, at other

times they have reflected frustration with inappropriate, counter-productive, costly, and

ineffective regulatory tools and administration. There is a huge anecdotal literature on regulatory

failures, spanning decades (see, for example, the historical reporting and fascinating anecdotes in

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works by Louis M. Kohlmeier, Jr., and Cindy Skrzycki; there are many articles in the National

Journal and in Regulation that describe regulatory behavior). Some of the typical complaints

include:

• Stifled innovation. Regulation tends to freeze industries, protecting the existing competitors

against new entrants, and slowing the introduction of new technologies. For example, in 1961,

the Southern Railway attempted to introduce its new aluminum “Big John” hopper cars, which

were capable of competing with barges in transporting grain. The barge lines and a number of

other businesses that depended on barge traffic or grain storage complained to the ICC, tying up

the regulatory approval process in the ICC and in the federal courts for years, forcing Southern

Railway to pay high legal fees, and preventing the Southern Railway from earning a swift

reward for its innovation. Studies at the time showed that just switching grain transport to the

cheaper rates of the Big John cars was sufficient to reduce the prices of many commodities that

even indirectly depended on grain, such as milk, beef, and poultry.

• Inconsistency in application; unresponsiveness to error. One of the classic cases of regulatory

failure concerned the Marlin Toy Company, whose popular transparent plastic children’s play

balls, the “Birdie Ball” and “Flutter Ball,” began breaking unexpectedly. A supplier had

substituted an inferior grade of plastic. The balls were taken off the market under the Hazardous

Substances Act, then administered by the Food and Drug Administration. The new Consumer

Product Safety Commission (CPSC) took over responsibility for this Act in 1973. Under

agreement with the CPSC, Marlin had replaced the plastic in its balls by then, but the CPSC

inaccurately listed the new balls as the banned ones. The Commission was unable to issue a

timely correction in its public listing of banned products. As a result, the company was unable to

sell its toys, and laid off most of its work force. It required the passage of a private bill by

Congress permitting Marlin to sue the government for the company to recover a portion of its

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damages.

• Mindless proceduralism. A common complaint about regulation is that it can feature procedural

requirements that are imposed in a rote way, without effective linkage to any substantive

rationales. Such proceduralism is often characterized as “red tape,” or termed “bureaucratic.”

Sometimes the proceduralism does have an unstated rationale, such as creating an entry barrier

that protects regulated firms from new entrants.

In a classic historical case in regulation from 1965, Tom Hilt, a young employee at his

father’s trucking company, Hilt Truck Line, became frustrated at having to type and retype tariff

schedules – lists of shipping rates between various locations – for submission to the Interstate

Commerce Commission. All new rates as well as rates proposed for change had to be approved

by the ICC. After Hilt submitted a lower tariff on frozen potatoes, meat, and grain, railroads had

challenged the reductions, claiming that Hilt’s rates were lower than its costs. Under ICC

regulations, cutthroat competition – selling below cost – was illegal, and had been since the

original Interstate Commerce Act of 1887. The railroads mounted such challenges routinely for

rate reduction submissions from competing transportation modes in order to protect their

competitive position, and the protest was not based on real knowledge of Hilt’s costs. The Hilt

Line had decided not to fight the challenge. So, after finishing typing tariffs that raised the rates

back up, a disgusted Tom inserted a new item at the end of one such list, “Yak Fat, Omaha to

Chicago. Rate: 45 cents per hundred pounds … to be shipped in minimum quantities of eighty

thousand pounds … Hilt Truck Line would accept yak fat in glass or metal containers, in barrels,

boxes, pails or tubs.” The ICC clocked in the new tariff, filed it, and “tariff watchers” for the

railroads noticed the filing. The railroads filed a formal complaint, complete with supportive data

and comparing the shipment to an earlier case dealing with paper articles, arguing the Hilt Line’s

rate was patently below cost. The ICC reviewed the submissions and suspended the yak fat rate,

20

responding routinely, as it normally did, to such a complaint. The railroads notified the ICC that

they had formed a yak fat arguing committee, on which sat representatives of a number of

midwestern railroads. Hilt Line never responded, and, after a while, the ICC closed the case,

warning Hilt it had been “afforded ample opportunity” to counter the railroads’ case. Of course,

the yak fat rate was entirely bogus, borne of impatience with a regulatory system that used

procedures originally intended to provide due process to protect a regulated industry from

competition.

• Excessive delays. The administrative process often permits intervenors to participate, realizing

both norms of due process and protecting regulatory decision makers when appeals courts look

to see if the required substantial evidence on the record was compiled. The procedures

themselves are often time-consuming, with many layers of review. The result is delay. It can take

an agency a year or more to issue a single regulation, and challenges to regulations can span

years, as they did in the Big John case.

• Inappropriate levels of standard specificity. Regulation has operated with vague standards in

some cases (e.g., many areas of economic regulation) and overly specific standards in other cases

(e.g., some areas of social regulation). Thus a standard like forbidding “unfair competition”

under economic regulation (for example, by the old Interstate Commerce Commission) tells us

by itself little about what is forbidden. This delegates effective regulatory policy making from

legislators to the regulators, who have sometimes implemented their discretion by offering

inconsistent, case-by-case interpretations. The other side to such vague controls is directive

regulation that entails highly descriptive “design standards” that detail the specific acceptable

means of compliance, admitting no adaptations. Examples include the original design standards

implemented by the Occupational Safety and Health Administration (OSHA) as it got under way

in the early 1970s. Thus, the exit sign standard specified every aspect of an exit sign, without

21

regard to the room or setting in which the sign was situated. Many OSHA standards were

originally adopted from boilerplate language designed for procurement contracts, not safety

regulations, simply in order to get OSHA implemented quickly. Such standards were pruned

from OSHA’s rulebook in the late 1970s. In general, standards can be ineffective when they

require compliance that is inappropriate to their contexts, as well as unnecessarily costly.

• Excessive costs; costs exceed benefits. It is not surprising that so much criticism has been

leveled by business at the costs of regulation. Many of the regulatory problems noted in this

article generate questionable costs, whether due to delay, proceduralism, inability to recover

savings from innovation, protection of the profits of special interests, or other factors.

• Protection of special interests. Private interests have sometimes been able to shape regulations

in ways that protect them from competition or that provide them with direct, tangible benefits

denied others. The iron triangles functioned in this way, of course. The ICC operated for decades

in a way that protected each mode of transportation against competition from the other modes.

Marketing orders administered under the U.S. Department of Agriculture kept the prices of navel

oranges high by restricting the supply of “whole fruit” allowed to go to market, while keeping

the price low on excess oranges treated as juice for Sunkist and other juice producers.

• Regulatory paternalism. Too often regulators assumed that the locus for the design of

regulatory standards lay completely in government. The industry was treated as suspect, not to be

trusted. This led to unrealistic, overly costly, and often ineffective standards. For example, the

original bicycle standard issued by the Consumer Product Safety Commission was developed in-

house, and widely criticized by industry as likely to be ineffective and needlessly costly. In

recent years, a whole subfield of administrative practice and research has grown under the

heading of “reg-neg,” regulatory negotiation, which aims to involve industry representatives

together with consumer and other stakeholder representatives, along with government regulators

22

as facilitators, early in the process of regulation development (see the work of such scholar-

practitioners as Philip J. Harter and Daniel Fiorino). Such collaborative development of

regulations tries to avoid paternalism, while yielding more effective regulation with a wider base

of support from those affected by the regulation.

• Conflict among regulations. The development of any regulation tends to proceed

independently of related or existing regulations. This can lead to the government effectively

prescribing opposing mandates. For example, OSHA noise protection rules have required ear

protectors for users of noisy machinery like drills, and also required back-up beepers on

workplace vehicles as a warning to pedestrians. How to avoid what may happen when a work

vehicle backs up toward an ear-protected worker using a drill is not considered.

• Inability to focus on cases where needed and to avoid cases where inapplicable; poor

targetability. Government tends to regulate what can be measured and controlled rather than

what is dangerous and can be made safer. Indeed, government too often regulates appearances

when it cannot or will not control outcomes. Thus, regulations attempt to control conflicts of

interest by requiring reporting of stock ownership by top officials, effectively regulating the

appearance of conflict of interest. But they permit lobbyists to flow campaign contributions to

legislators who are key to creating or blocking new regulatory legislation. The only conceivable

reason such contributions are made, of course, is to influence such actions – the issue is not

appearances, but active biasing of outcomes.

• Feasibility of regulating in some areas. Just as perfect agency – perfect performance by

agents for principals -- —is only rarely, if ever, attained, so are there limits to what can be

controlled by regulation. Regulation of jaywalking is common in American cities, yet, apart from

a very few central city locations, is impossible to implement universally and, indeed, is enforced

only sporadically. The regulation appears to exist primarily for educational and/or emergency

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uses.

Regulatory Agencies in the U.S.

Unlike some national systems of regulation around the world in which the central

government reserves to itself all significant regulatory controls, including direct inspections,

regulation in the U.S. has been adapted for our federal system. U.S. regulation also displays

characteristic institutional structures and administrative processes, including the process of

judicial review of its decisions.

Regulatory Federalism: The Granting of Primacy to the States

In the United States, regulation is performed by governments at all levels, federal, state,

and local. Major new regulatory initiatives usually, though not always, begin at the federal level,

but are often implemented via federal to state handoffs. Thus, a new piece of social regulation

might create a new federal agency or a new program within a federal agency. Under federal rules

set in the legislation, if states pass legislation similar though not necessarily identical to the

federal act, provide state funding, and adopt regulations consistent with the federal ones, the

federal government can grant states primacy. This permits the state to be the regulator of first

contact and, of course, primary effect. State inspectors, not federal regulators, are likely to be the

ones to visit regulated workplaces. Federal inspectors fall back to support positions, though they

may intervene. Some, such as those at the Occupational Safety and Health Administration, may

concentrate on the most dangerous enterprises. Primacy has usually functioned well, and has

been pulled back only infrequently. During the Reagan Administration, severe cutbacks in

federal agency staffing and budgets were implemented in response to White House policy

favoring loosened enforcement. When failures in state regulation of mine safety emerged in a

few states in the absence of federal assertion of authority, in some cases involving corruption,

federal regulators were forced to cancel primacy and reassert full federal control in those states.

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Institutional Structures and Practices in Federal Regulation

Federal regulation in the U.S. is implemented via a mix of institutional structures that do

not reflect a consistent design practice or rationale. In addition, although there have been

sporadic efforts to combine sector or industry controls in the same agency setting, such controls

can still be found split in different locations. Thus, antitrust and competition regulation is split

between the Federal Trade Commission (FTC) and the Department of Justice. Consumer

protection in transactions is in the FTC, while consumer safety is in the Consumer Product and

Safety Commission (CPSC). The Food and Drug Administration regulates some aspects of food

safety, as do parts of the Department of Agriculture. The stringency of controls is also

inconsistent. The CPSC can issue mandatory product recalls; the Department of Agriculture’s

Food Safety and Inspection Service can ask meatpackers to recall adulterated meat but does not

issue mandatory recalls (though it can seize adulterated product from the marketplace).

Institutional forms include the independent regulatory commission, dating to the Interstate

Commerce Commission, which as noted above became independent in 1889, and the executive

branch administrative agency. The independent commission has been structured as partly

independent of Presidential policy, but even this status varies. Presidents can designate a

commissioner as chair, but cannot always remove a chair. In the independent commission,

commissioners are nominated by the President, confirmed by the Senate, but cannot be removed

by the President, unlike top-level Department appointees. There has been a trend to place new or

reorganized independent commissions inside government departments for administrative

reasons, while retaining most of their previous independence. Thus the Federal Power

Commission, when reorganized as the Federal Energy Regulatory Commission, was placed

inside the Department of Energy rather than, as before, free-floating in government space. The

Surface Transportation Board, successor to the Interstate Commerce Commission, was placed

25

inside the Department of Transportation. But, apart from the occasional requirement to consider

policy initiatives from the Department Secretary and other relatively minor stipulations, such

agencies still function as they did before.

In contrast, regulation by executive branch agencies functions as does the rest of the

federal government. The head of the Food and Drug Administration has the title of

“Commissioner,” is nominated by the President and confirmed by the Senate, but serves like

other executive appointees at the pleasure of the President. The particular regulatory tools used,

such as design standards, can be exactly the same whether in a commission or an executive

branch agency. The U.S. Environmental Protection Agency (EPA) is unusual in that it is an

independent agency, not inside a Department, but functions as an executive branch agency. Its

top post, the EPA “Administrator,” serves at the pleasure of the President, like other top

executive appointees.

Today, the number of commissioners on an independent regulatory commission varies

from three to five; in decades past the number ranged as high as eleven. Most economic and

social regulatory agencies in the twentieth century were small relative to agencies in the

executive branch, with a few hundred to a few thousand employees and budgets in the seven to

eight digit range. The expansion of federal authority now subsumes many government functions

not previously thought of as regulatory. Thus, the annual compilation of regulatory budgets by

the Weidenbaum and Mercatus Centers shows a Fiscal Year 2007 total budget for regulatory

activities of $44.2 billion and a staffing level at 245,361 full-time equivalent people. The

comparable numbers were $43 billion and 241,029 in 2006. Adjusted for inflation, the budget

total is actually slightly less. But these totals include many functions that would in the past have

been considered as related to defense, such as homeland security, as well as to other functional

areas. In 2003, the Transportation Security Administration alone hired over 50,000 airport

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screening agents, greatly inflating the apparent size of regulatory staffing.

As illustrations, the estimated outlays by the Consumer Product Safety Commission for

2006 are $65 million with a staff of 440; for the FDA, $1.875 billion with a staff of 10,164; for

OSHA, $484 million with a staff of 2173; for the Environmental Protection Agency, $5.395

billion with a staff of 17,302; for the Federal Communications Commission, $365 million with a

staff of 1886; and for the Federal Trade Commission, $220 million with a staff of 1080. The

Securities and Exchange Commission budget jumped from $357 million with a staff of 2841 in

the year 2000 to $867 million with a staff of 3765 in 2006 largely due to extra resources given it

after the corporate scandals, with the passage of the Sarbanes-Oxley Act in 2002. It should be

noted that some regulatory agencies are funded at least partly by fees or penalties, rather than by

outlays from the federal budget, reducing their actual central budget cost.

Political party balance on a regulatory commission is often required by statute. Thus, no

more than three members of the five-member Federal Trade Commission can belong to the same

political party. In one historical case, the appointment of Joseph Eastman to the ICC in the early

years of the last century briefly became an issue. With his typical honesty, Eastman notified

Congressional leaders that he was an independent, not registered to either major party, and so, in

his own view there was an issue as to whether he could be appointed to a seat that would

normally go to a member of a party to ensure statutory balance on the ICC. Eastman did this on

principle – he did not believe regulatory officials should be partisans. Senator Henry Cabot

Lodge is said to have deliberately ignored the observation of his constituent, and Eastman’s

famous career as an ICC commissioner began.

Statutes also often set up the terms of commissioners to be overlapping in order to maintain

policy uniformity and institutional memory. Thus, on some commissions, one commissioner’s

term ends each year, though even this is not consistent across all commissions. For example,

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terms on the five-member Federal Trade Commission (FTC) are seven years, not five. Thus the

five FTC commissioner terms expire in five straight years, followed by a gap of three years, then

five more expirations and a gap of three years, and so on. This pattern has existed since 1914.

The Federal Communications Commission (FCC) and the Securities and Exchange Commission

(SEC) each have five members who serve overlapping five-year terms, so that one member’s

term expires each year. But the expiration date of those terms is not the same for each agency.

The reasons for the differences among the agencies are historical, not based in some intrinsic

agency characteristics.

Judicial Review of Regulation

In general, decisions by the federal regulatory agencies may be challenged in the federal

appeals courts, with the possibility of review by the U.S. Supreme Court. A string of federal

cases has narrowed the qualifications that any party must have in order to bring suit against

agency decisions, i.e., have “standing to sue.” In most cases, that party must at least show that

s/he is individually “aggrieved” in a manner covered explicitly by the enabling statute. Review

courts look to see if the agency has compiled “substantial evidence on the record,” i.e., collected

evidence on all the decision criteria specified in the enabling statute and in its own rules. There is

no requirement that the review court determine that the agency actually weighed all that evidence

so as to produce a decision consistent with the content and balance of the evidence. All that is

required is that the evidence be there. This decision rule can create an interesting and potentially

mindless dynamic, as agencies routinely assure that the evidence covered at rulemaking hearings

and in adjudications – indeed, in any reviewable context – touches on all criteria mentioned in

the enabling statute and in agency regulations. Such procedure is also potentially a recipe both

for delay and for manipulation over the content of the record.

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Some Tools of Regulation

In recent decades, the tool set of regulation has expanded from the traditional directive

standard to include a variety of innovative and sometimes incentive or market-based alternatives.

Traditional Standards

The traditional tool of U.S. regulation is the standard. The agency promulgates a rule that

either incorporates standards specified in the enabling legislation, or creates such a standard

under authority created by the legislation. The standards amount to mandatory directives for

behavior. As noted above, the standards can vary greatly in specificity. In the context of social

regulation, standards are sometimes called “design standards” because they fully specify the

compliance required, whether it is use of hay bales to control mine runoff under the regulations

of the Office of Surface Mining Reclamation and Enforcement or the height of fire extinguishers

above the ground under old, now deregulated OSHA rules. Penalties are attached to

noncompliance with the directives. The use of standards assumes that the activities that standards

specify will produce the outcomes desired under the regulation, such as a cleaner environment or

a safer workplace. But the social science on many such regulations that would establish whether

the standards actually produce their intended outcomes has often never been done. In fact, some

critics argue that such standards often have the opposite effect – by locking in certain compliance

technologies, they inhibit the development of innovative, efficient, and more effective means of

compliance. On the other hand, when regulated actors strongly oppose the regulations and/or are

likely to game or manipulate regulations that allow discretion in compliance, the standard

provides an easier-to-measure and more certain control.

New Regulatory Tools Featuring Incentive Effects and Discretionary Compliance

Beginning in the 1970s during the Carter Administration, largely in the context of social

regulation, a number of innovative means of regulation were developed that aimed to produce

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outcomes better than those from old-style directive regulation. The use of tax incentives in the

form of tax credits was a familiar and widely criticized tool, and, until that era, incentive

regulation had rarely been employed elsewhere. Tax incentives were useful only on those who

paid taxes, and amounted to an implicit subsidy from the Treasury. In contrast, incentives like

effluent charges, which put a price or fee on each unit of pollution emitted from a plant, tried to

create direct incentives for polluters to reduce emissions. A company’s total costs for pollution

would go down as it reduced emissions.

Other methods sought to make use of a company’s own knowledge of costs of

compliance to produce both more effective and more efficient compliance. For example, the

regulatory bubble placed an imaginary bubble over a plant that had multiple air pollution

sources. Old-style standards would have required each smokestack to reduce emissions to a set

level, per a standard. With a bubble, the company was able to use its own discretion to decide

which sources on the site to reduce, as long as the total emissions met the EPA bubble standard

for the site. The company had to worry only about total emissions from the site, combining all

the sources. Some sources, in newer facilities, were typically much cheaper to control than those

from older plants. Emissions from the bubble could be adjusted by the regulator to ratchet down

total site emissions below the total level that would have resulted from regulating individual

stacks, leaving both the company, which could do the reductions in the cheapest manner, and the

public, which would get, overall, cleaner air, better off.

A similar logic created regional or urban permit auctions. An imaginary bubble was

placed over a region and pollution permits issued to all polluters in the region. If any company

wished to expand, it would have to purchase permits from other polluters. Such permits might

become available (and, indeed, sold for profit) when plants were closed or equipment upgraded

to more efficient, cleaner technologies. Any trade in permits resulted in an automatic reduction in

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the permitted levels by a certain percentage, e.g., fifteen percent. Thus, pollution would ratchet

down as permit trades occurred and the total pollution “value” of permits in the regions moved

downward. The problem with such markets is that they ignored localized effects. Companies

could build very dirty sites, polluting nearby communities, if they could purchase the permits

elsewhere in the air shed.

One solution to the problem of design standards was to use “performance standards.”

These standards set the outcome levels directly, and allowed industry to figure out the best way

to reach those outcomes. Like the bubble, the performance standard took advantage of industry

expertise and used the discretion it permitted industry to make all concerned better off. One

problem with performance standards is simply that it is often difficult to measure outcomes

directly in many regulated areas. Unless outcomes can be measured consistently and with high

certainty, there may be opportunity for manipulation. But in such contexts as environmental

pollution or workplace safety, it is sometimes possible to directly measure such performance

success, and so performance standards can be a significant advance. It is likely that future

regulatory tools will take advantage of incentive and market-like effects in order to reach

outcomes above those achieved in the past via traditional standards.

The newer regulatory tools have also tried to shape the decision setting for the

respondent. Thus, transparency or information provision has been used to take advantage of

consumer choice and reputational factors in encouraging companies to modify their behaviors.

And, as discussed above, the administrative process itself has been modified in some agencies to

try to involve all regulatory stakeholders early in the rulemaking process. If a “reg neg” process

results in a quality regulation supported by both industry and consumers, lengthy court

challenges will be avoided and the regulation itself is likely to be more effective.

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Strategic Use of Regulation

Despite the development of new, more effective regulatory tools, business may continue as

it has done for decades and take strategic advantage of regulation. Indeed, though public

discussion might suggest that regulation is a continual burden for business, more often than not

the opposite is true: Regulation protects and gives competitive advantages to companies able to

exploit its impacts. In general, large firms gain advantages over smaller competitors under

regulation. They are better able to handle the demands of compliance. Under newer forms of

regulation, such as performance standards, they can afford to employ expert central staffs that

can design compliance activities that are most efficient for the firm; smaller firms must contract

this out and thus have higher costs and less of an opportunity to develop adapted, customized

responses to the regulation.

Of course, a view that treats regulation as a strategic opportunity rather than as a citizen

obligation raises serious ethical issues. To the extent to which newer means of regulation achieve

both public and private ends, yielding better as well as cheaper compliance, the ethical stress is

reduced. But in a society that operates under both the rule of law and a representative democracy

in which the choices to impose costs and achieve common benefits are made legitimately,

business must act as a citizen and not just a player. Thus, the description below of strategies

under regulation is offered descriptively, rather than as a kind of normative guide to what should

be done under regulation. When such strategies run counter to public policy, regulators must find

innovative means to counter them, much as they developed replacements for traditional

regulation. In the environment current of this writing, 2006, government is widely exploited for

private gain by American business, making use of sophisticated lobbying, carefully targeted

campaign contributions, relationships with friendly legislators who use the earmarking capability

in legislation to divert public benefits to narrow private interests, and other means. Most such

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mechanisms were not anticipated by the Constitutional designers, and so the work of academics

and public policy advocates alike remains to design practical means to ensure that business no

longer gets the best government money can buy in the United States.

Many strategies are available to firms that seek to manipulate regulation and gain

competitive advantage. The explicit literature on strategic use of regulation is now extensive and

goes back at least to the 1970s, but similar arguments have populated the literature on regulatory

capture for decades. Early work in the area was done by such scholars as Bruce M. Owen &

Ronald Braeutigam, Robert Leone, Barry Mitnick, John Mahon, Alfred Marcus, Richard Harris,

Donna Wood, David Baron, and George Stigler, among others. These strategies include:

• Strategic use of information. Firms know their costs and their compliance status better than

regulators and can shape information responses, withhold information, or flood agencies with

information to gain advantage in compliance.

• Strategic use of litigation. Larger firms tend to have deeper pockets available to support

expensive litigation before regulatory agencies and to challenge regulation in the courts. Just the

threat of litigation can be enough to deter small firms seeking to be new market entrants in a

regulated industry.

• Strategic use of innovation. Innovation can be used both to lower the costs of compliance to

regulation and to gain competitive advantage over other firms subject to the regulation. U.S. auto

manufacturers told Congress that there was no technology to reduce emissions as the original

Clean Air Act would require. At the same time, each manufacturer was secretly developing the

technology. When a Japanese company introduced cars with such technology, Detroit’s car

companies were quick to follow, apparently pulling the technology out of thin air.

• Exploitation of cross-subsidies. Under regulation, firms use funds from a more profitable –

“creamy” – part of their business to subsidize an unprofitable segment. Prices in the unprofitable

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segment are deliberately set low, either for competitive reasons, or to build support from the

group or groups receiving the subsidized prices. Thus, transportation companies set rates low for

senior citizens. If threatened with undesired regulation, these companies can warn that the new

regulation will make it impossible for them to keep the low rates for seniors. Lobbies for senior

citizens then file briefs supporting the transportation companies. The choice of seniors is no

accident – a much higher proportion of seniors vote.

• Cooptation of coalition partners. Besides cross-subsidizing politically powerful customers in

order to defend against undesirable regulation, firms can provide benefits to their stakeholders in

order to build political coalitions for or against regulation, as desired. For example, in Pittsburgh,

the city’s elected leadership has been hostile to billboards for years, viewing them as urban

blight. The city’s dominant billboard company has donated empty billboard space to nonprofit

organizations for limited periods of time for the cost of the sign and a fee for placing it.

Whenever a proposal comes before the Planning Commission for restriction of billboards, a host

of the city’s largest nonprofits show up to testify against the regulation.

• Use of the agency as a cartel manager. By setting prices and policing trade practices in an

industry, an economic regulator can act as a cartel manager who stabilizes the industry and

protects it from new market entrants. The Interstate Commerce Commission acted in this role by

protecting each regulated mode, railroads, trucks, and barges, against new competition from

other modes or new entrants. As in the Big John and Yak Fat cases, the modes gain strategic

protections by challenging the actions of transportation competitors, using the ICC to defend and

enforce their protected activities.

• Effective lobbying. Effective strategic behavior in regulation often includes the adroit use of

lobbying. Legislators depend on industry lobbyists for information on issues, and the literature

tells us that lobbyists can perform as extensions of the legislator’s staff, helping to write

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speeches, draft legislation, conduct liaison with groups supportive of issues the legislator

supports, and so on. Lobbyists are as important in their roles as shapers of issues, defining the

public agenda, as they are in providing tangible electoral support in the form of steering

campaign contributions and organizing group support. By developing long-term relationships

with key legislators, guaranteeing access whenever major regulatory issues need to be advanced

or resisted, lobbyists can play a central role in making policy in regulation.

• Cooptation of the experts. Because the administrative process depends on the building of

substantial information on the record, and regulated areas tend to cover issues that are technical

to the industry, the use of specialists can be essential to effective participation both in that

process and in the judicial appeal process. Larger firms with deeper pockets can afford to have a

field’s top experts on retainer, denying their availability to competitors. Before deregulation,

A.T. &T. provided support to many of the country’s top experts on communications regulation,

potentially making them unavailable to challengers such as MCI.

• Trading off the agencies/choosing regimes. Firms can sometimes choose their regulators. State

regulatory regimes can differ appreciably, so that location decisions can be influenced by state

regulations. Federal law in some areas of regulation allows states to have regulations more

stringent than federal ones. In essence, firms can choose federal over state regulations by

locating in a state that achieved primacy by closely following federal rules. In addition, the

granting of primacy by a federal agency does not generally require that a state’s regulations be

identical to the federal regulations in every respect. Thus firms can track such differences.

Finally, some areas of regulation allow a choice between a federal or a state regulator, e.g.,

between establishment as a state mutual savings bank or a federal savings and loan.

• Blowing the whistle. Firms complain to regulators that competitors are in violation of

regulatory standards. For example, there are two competing technologies in solid waste disposal:

35

incineration vs. burial. The companies that specialize in each regularly complain to regulators

that their competitors in technology violate air pollution standards on the one hand, and effluent

or ground water contamination standards, on the other.

• Regulatory pork barrel. Just as firms benefit from building “pork barrel” projects steered to

their districts by legislators, so can firms obtain benefits in the form of regulations tailored to

benefit them against their competitors. Thus, tariffs can be designed to raise the costs of imports

from competitors. Standards can reflect bias for domestic or district products over international

suppliers or competitors elsewhere in the U.S.

Conclusion

Although its performance has been questioned, and though it has sometimes been used to

divert public resources to private ends, regulation remains a central and essential function of

government. It remains a work in progress, and the tasks of both scholars and policy makers in

the future will be to devise increasingly efficient, effective, and just social and economic controls

worthy of the democracy in which they are embedded.

Barry M. Mitnick and Kathleen Getz

See also Administrative Procedure Act (APA); Airline Deregulation; Archer Daniels Midland;

Asymmetric Information; Auction Market; Barriers to Entry and Exit; CAFÉ Standards; Child

Safety Legislation; Commodity Futures Trading Commission; Consumer Activism; Consumer

Product Safety Commission; Consumer Protection Legislation; Cross-Subsidization;

Deregulation; Employee Protection and Workplace Safety Legislation; Environmental Protection

Agency; Environmental Protection Legislation and Regulation; Externalities; Federal

Communication Commission; Federal Energy Regulatory Commission; Federal Reserve Board;

36

Federal Trade Commission; Financial Accounting Standards Board; Food and Drug Safety

Legislation; International Standards Organization; Interstate Commerce Commission; Iron

Triangles; Market Failure; Market Power; Monopolies, Duopolies, and Oligopolies; Motor

Vehicle Safety Act; National Ambient Air Quality Standards (NAAQS); National Highway

Traffic Safety Administration (NHTSA); National Labor Relations Board; National

Transportation Safety Board; Nuclear Regulatory Commission; Occupational Safety and Health

Administration; Pollution Externalities, Socially Efficient Regulation of; Pollution Right; Public

Company Accounting Oversight Board; Public Interest; Public Utilities and Their Regulation;

Regulatory Flexibility Act of 1980; Revolving Door; Sarbanes-Oxley Act of 2002; Securities and

Exchange Commission; Self-Regulation; Subsidies; Tax Incentives; Transparency, Market;

Unfair Competition; U.S. Food and Drug Administration; Worker Safety.

Further Readings and References

Ayres, Ian, & Braithwaite, John. (1992). Responsive regulation: Transcending the deregulation

debate. New York: Oxford University Press.

Bernstein, Marver H. (1955). Regulating business by independent commission. Princeton, NJ:

Princeton University Press.

Breyer, Stephen. (1982) Regulation and its reform. Cambridge, MA: Harvard University Press.

Dudley, Susan, & Warren, Melinda. (2006). Moderating regulatory growth: An analysis of the

U.S. budget for fiscal years 2006 and 2007. Arlington, VA: Mercatus Center, George

Mason University and St. Louis, MO: Murray Weidenbaum Center on the Economy,

Government, and Public Policy, Washington University.

Eisner, Marc Allen. (2000). Regulatory politics in transition, 2d Ed. Baltimore, MD: Johns

Hopkins University Press.

37

Eisner, Marc Allen, Worsham, Jeff, & Ringquist, Evan J. (2006). Contemporary regulatory

policy. 2d Ed. Boulder, CO: Lynne Rienner Publishers.

Fiorino, Daniel J. (2006). The new environmental regulation. Cambridge, MA: MIT Press.

Kerwin, Cornelius M. (2003). Rulemaking: How government agencies write law and make

policy, 3rd Ed. Washington, DC: CQ Press.

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