BPEA | 1989: Microeconomics

The Economic Theory of Regulation after a Decade of Deregulation

Microeconomics 1989

WHAT HAS COME to be called the economic theory of regulation, or ET, began with an article by George Stigler in 1971. The most important element of this theory is its integration of the analysis of political behavior with the larger body of economic analysis. Politicians, like the rest of us, are presumed to be self-interested maximizers. This means that interest groups can influence the outcome of the regulatory process by providing financial or other support to politicians or regulators. Simultaneously with Stigler, Richard Posner provided an important critique, and several years later he gave the theory its grandiose name. The major theoretical development of the ET has been an article by Peltzman in 1976 and one by Gary Becker in 1983. By conventional measures the theory has been an academic success. In this paper I evaluate that success in light of the changes in regulatory institutions that have occurred since the ET’s early development.