Theories of Regulation Lesson 5 Outline l Definition

Theories of Regulation Lesson 5

Outline l Definition of Regulation l Process of Regulations l Regulatory Agency Employees l Theories of Regulation

Definition l l 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 l Regulatory agencies are influenced by • Politicians • Regulatory agency employees • Firms • Interest groups

Process of Regulation l 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 l l l Careerist • • Wants agency to exist and grow Careerist wants simple rules to avoid problems • • Will leave agency for other office Politician wants to please interest groups • • Will move on to other work Professionals want more complex rules Politician Professional • • Complex rules create demand for smarter professionals Professionals are paid more

Theories of Regulation l Different theories explain the relationship between the public and regulatory agencies l Public Interest Theory Capture Theory Principal Agent View Parkinson’s Law l l l

Public Interest Theory l Government creates a regulatory agency. • Government wants to correct a problem in a market l 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 l Example 2 - Firms producing contaminated foods • Gov. regulates food, reducing food contamination l Regulation increases “social welfare” • Improves society

Capture Theory l 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 l The industry controls the regulatory agencies. • Industry wants high prices and low output • Industry wants to capture consumer surplus

Capture Theory l Second variation • Firms or an interest group capture the regulatory agencies l 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 l l Politicians write favorable laws for firms or interest groups Regulatory agencies follow and enforce the laws

Principal Agent View l l l 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 l l 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 l Law - Government agencies expand over time • • l 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 l l l 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 l 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 l 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 l l Thus, the size, scope, and mission of gov. increases each year U. S. government agencies increase 5 to 10% per year

Conclusion l My opinion l Public Interest View dominates for new or re-structured regulatory agencies l Capture Theory, Principal Agent View, and Parkinson Law start to dominate over time as regulatory agency matures

References l 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