WikiSummary, the Social Science Summary Database

 

Noll. 1989. Economics perspectives on the politics of regulation. In Handbook of Industrial Organization, eds. RD Willig and R Schmalensee. Vol 2: 1254-1287.

In Brief

Noll evaluates two theories concerning the politics of regulation.

The "Public Interest" Theory

• Y: When regulation occurs
• X: Transaction costs

"Fixing" market failures involves significant transaction costs. In such a situation, the transaction costs for negotiation might be so high that regulation is the better alternative.

The "Interest Group" Theory

• Y: Efficiency of regulation (assuming it occurs)
• X: Number of interest groups (equally sized groups --> more efficiency)
• X: organization of interest groups (homogeneity of preferences and group size matter)

The interest group theory focuses on the principal-agent relationship between citizens (esp. interest groups) and government officials.

In an Olsonian perspective: Interest groups help overcome problems of one vote not making a difference (powerlessness) and information problems. Organized groups help solve these problems.

Evaluation

Noll claims that both approaches are off; ideology and party voting explain more about regulatory issues than interests do. This is similar to the "capture" theory reviewed in Viscusi. If some groups are dominant, they will capture the state and extract rents.