Capturing Regulatory Reality: Stigler's The Theory of Economic Regulation

15 Pages Posted: 7 Jul 2016

See all articles by Christopher Carrigan

Christopher Carrigan

George Washington University - Trachtenberg School of Public Policy and Public Administration

Cary Coglianese

University of Pennsylvania Law School

Date Written: July 4, 2016

Abstract

This paper offers a retrospective assessment of economist George Stigler’s classic article, The Theory of Economic Regulation. Stigler argued that regulation is a product that, just like any other product, is produced in a market, and that it can be acquired from the governmental “marketplace” by business firms to serve their private interests and create barriers to entry for potential competitors. He challenged the idea that regulation arises solely to serve the public interest and demonstrated that important political advantages held by businesses can contribute to industry capture of the regulatory process. Although his argument was largely based on the theoretical framework he developed, Stigler also illustrated his insights with empirical evidence from state-level regulatory schemes, including trucking regulation and occupational licensing. In this paper, we re-examine Stigler’s argument and analysis more than forty years later. Despite the great value of Stigler’s work in illuminating the problem of regulatory capture, his influential article nevertheless did exaggerate the power of business over regulators, as he suggested the existence of nearly an iron law of business control that clearly does not exist. He also confusingly conflated elected legislators with more independent agency bureaucrats, failed to rule out the public interest theory of regulation, and relied in part on unrealistic assumptions about the political economy of regulation. Notwithstanding these shortcomings, Stigler’s ground-breaking theory holds enduring value to both scholars and policymakers, and his innovative use of economic principles and empirical analysis provides a much-needed template for the further study of regulation and regulatory institutions even today.

Keywords: Economics, Administrative Law, Political Economy, Regulatory Institutions, Empirical Analysis, Weighing of Benefits and Costs, Public Policy, George Stigler

JEL Classification: B32, K2, K23, P16

Suggested Citation

Carrigan, Christopher and Coglianese, Cary, Capturing Regulatory Reality: Stigler's The Theory of Economic Regulation (July 4, 2016). U of Penn, Inst for Law & Econ Research Paper No. 16-15. Available at SSRN: https://ssrn.com/abstract=2805153 or http://dx.doi.org/10.2139/ssrn.2805153

Christopher Carrigan

George Washington University - Trachtenberg School of Public Policy and Public Administration ( email )

805 21st Street, NW
Suite 601
Washington, DC 20052
United States
(202) 994-5583 (Phone)
(202) 994-6792 (Fax)

HOME PAGE: http://www.tspppa.gwu.edu/faculty/carrigan.cfm

Cary Coglianese (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6867 (Phone)

HOME PAGE: http://www.law.upenn.edu/coglianese

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