Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of 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. It is the process by which regulatory agencies eventually come to be dominated by the very industries. Economic rights, legal rights, and the scope of the state political economy of institutions and decisions. Stigler swork1971considerablyextendedthe paradigm by noting thatthe regulatoryprocess canbe capturedbysmall businessindustries aswell,andby usingolsonstheory of collectiveaction 2. Bell journal of economics and management science 2 spring. The characteristics of the political process which allow relatively small. The economic literature distinguishes between positive and normative economic theories of regulation. This chapter discusses george stigler s the theory of economic regulation, a stinging analysis of regulation from a political economy perspective. Stigler the university of chicago the potential uses of public resources and powers to imrtprove the economic status of economic groups such as industries anid occupations are analyzed to provide a scheme qf the demand for regulation. From the bell journal economics and mangagement science, vol. For an individual producer, however, the sunk costs can mean that it is rational to wait until other suppliers have sorted out the capacity. Economics of information an overview sciencedirect topics.
The economic theory of regulation after a decade of. Published in 1971, stigler s paper challenged the idea that regulation is designed and operated primarily for the benefit of business, rather than solely to advance the overall public interest by correcting market failures. Stigler made a strong claim in the theory of economic regulation. Few economists have so consistently and successfully combined economic theory with empirical analysis, or ranged so widely.
An economic interpretation of the history of congressional voting in the twentieth century sam peltzman 5. The most important element of this theory is its integration of the analysis. Two main theories of economic regulation have been proposed. Regulatory capture i stigler s approach stigler 1971 advocated an economic theory of how the regulation of business comes to be. Working papers the university of chicago booth school of. It is intended to explain the supply, demand, and practical use of government regulatory power over the economy. Coase n a world in which so much offends, it is a comfort when something happens which is clearly right. Stigler joined the faculty of chicago booth and the department of economics at the university of chicago in 1958. This theory holds that regulation is supplied in response to the demand of.
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. This paper adds a dimension to informationrelated problems by. The political economy of corporate environmentalism products liability and prescription drug prices in canada and the united states logrolling and economic interests in the passage of the smoothawley tariff. The special interest pressure is always more persuasive, so producers always win. The economics of information by george stigler presented by lara converse, elyas fermand, aditya rachmanto, and annie tao edgeworth introduction in economics, the information known by actors is generally taken to be given and is often assumed to be perfect. This paper offers a retrospective assessment of economist george stigler s classic article, the theory of economic regulation. One is the public interest theory, bequeathed by a previous generation of economists to the present generation of lawyers. This included, but was not limited to, the regulation of monopolies. Fifth part analyzes the work the organization of industry 1968. Regulation may be actively sought by an industry, or it may be thrust upon it. Regulatory capture is a theory associated with george stigler, a nobel laureate economist. George stigler, 19111991 the university of chicago. The potential uses of public resources and powers to imrtprove the. The main difference between regulation and other products is that the political process defines the structure of the market for regulation.
Pdf theory of economic regulation semantic scholar. The 1962 piece argued that regulation had no effect on electricity rates and the 1971 article famously laid out the capture theory of regulation. The second was his 1971 article in the bell journal of economics and management science on the theory of economic regulation. The theory of economic regulation is an economic theory developed by george stigler.
Stigler regarded economic theory, in the words of alfred marshall, as an engine for the discovery of con crete truth, not as a subject of interest in its own right, a branch of mathematics. This theory holds that regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices. Regulation is acquired by the industry, stigler argued, and. The economic theory of regulation after a decade of deregulation what has come to be called the economic theory of regulation, or et, began with an article by george stigler in 1971. Stigler is best known for developing the economic theory of regulation, also known as capture, which says that interest groups and other political participants will use the. Noll during the past twentyfive years the amount of research on the economics of government regulation has increased enormously. The main difference between regulation and other products is that the political. He forcefully argued that instead regulation is acquired by the industry and is designed and operated primarily for its benefit p.
Regulatory capture archives page 23 of 23 pro market. The study of publicpolicy approaches to problems in industrial organization was once. The positive variant aims to provide economic explanations of regulation and to provide an effectanalysis of regulation. Stigler, the theory of economic regulation, 2 bell j. Economics of information the economics of information is the title of a seminal article, published in 1961. Stigler punctured the idea that regulation arises solely to advance the overall public interest by correcting market failures. A theory of primitive society, with special reference to law richard a. A regulator congress, an agency, or whatever faces special interest pressure from producers and electoral pressure from consumers.
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. In a seminal 1971 article, the theory of economic regulation, he presented and gave evidence for his capture theory. George stigler academic dictionaries and encyclopedias. The normative variant investigates which type of regulation is. In particular, stigler examines the various ways in which disparate interest groups are able to influence and use government power to advance their economic needs. This article argues that while there are a few transparent similarities between politics and markets, the fundamental differences between them render the stigler wittman view that politics is just another market, and therefore always efficient, dubious at best. The potential uses of public resources and powers to improve the economic status of economic groups such as industries and occupations are analyzed to provide a scheme of the demand for regulation. Stigler argued that governments do not end up creating monopoly in industries by accident. The three theories i focus on are the welfaretheoretic or public interest theory of regulation associated with pigou 1938, the contracting theory associated with coase 1960, and the capture theory of stigler 1971. The characteristics of the political process which allow relatively small groups to obtain such regulation is then sketched to provide elements of a theory of supply of regulation. The theory of economic regulation, published in 1971. Stigler is best known for developing the economic theory of regulation, which says that economic and political interest groups will use the regulatory and coercive powers of government to shape laws and regulations to benefit themselves. Because this consideration applies to all producers, the overcapacity can persist for a.