Viscusi, Vernon, and Harrington: Economics of Regulation and Antitrust

Viscusi, Vernon, and Harrington. 2000. Economics of Regulation and Antitrust. Cambridge: MIT Press, 3d edition, pages 297-336.

Discusses the three historical approaches to studying regulation of the economy:

1. Early work assumed that regulation occurred when it was necessary to overcome market failures. Viscusi calls this "normative analysis as positive theory" (NPT). (Noll calls this the "public interest" theory.)
2. Then, work shifted toward "capture theory" (CT), the idea that regulators get "captured" by the industry they are supposed to regulate, and end up serving that industry's interests instead.

The authors point out that neither of these two early approaches was really a theory; neither explained when regulation will occur, or how. Thus were just empirical observations (and not very good ones). See also Noll about these first two.

1. More recent work, "economic theory" (ET), has presented useful theories of how and when regulation will occur. It all started with Stigler, then was modified by Peltzman. Becker made an important contribution. See Access notes. See also Stevens about these last three.

Main point about NPT: regulation doesn't always respond to market failures, and regulation isn't always appropriate from a social welfare perspective (it creates net costs for society).

Main point about CT: Why do we have regulations that do resolve market failures? Why are some regulations actually public-spirited?

Olson still matters. It matters whether you are a big or small player. Big firms will lobby for more protection.

Empirical test:

Viscusi summarizes one study that is a nice test of all the theories: bank deregulation. States deregulated banks at different times. So Y = the timing (over a 20-30 year span) of state deregulation. A proxy for the capture idea: Large banks favor deregulation, small banks oppose it. Also, small firms favor deregulation (so that they can get credit cheaper). So the authors look at the share of small firms and small banks in each state.