Stigler's Theory of Economic Regulation After Fifty Years

Abstract

George Stigler’s “The Theory of Economic Regulation” (1971) is a landmark in the economics of regulation. It used simple public choice reasoning to set out the “capture theory” of regulation whereby “… as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.” This article, written for a commemoration of the 1971 article in Public Choice, summarizes the context within which the article appeared and evaluate its long run impact. A central argument is the need to distinguish “acquired” from “designed and operated.” The rule that regulation is produced in response to industry pressure seems honored mainly in the breach. Maintenance of the institutional status quo seems the more common industry goal. However, once the status quo is altered, the industry interest will, as Stigler argued, receive disproportionate weight. I discuss and analyze the varying impact of industry interests over three significant regulatory transitions – in transportation, pharmaceuticals and banking. I conclude that the durable impact of Stigler (1971) comes from the public choice framing and the consequent importance of organized interests to analysis of regulation.

Keywords: Key Words: Regulation, Capture, Interest Groups, Political Economy, Public Choice, George Stigler.

JEL Classification: JEL Classification: D72, D73, D78, H11, K20, K23, L51