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Stigler: The theory of economic regulation

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Understanding
Bureaucracy

Stigler. 1971. The theory of economic regulation. Bell Journal of Economics and Management Science 2 (spring): 3-21.

In Brief

Stigler uses a simple model of regulation: A regulator (Congress, an agency, or whatever) faces special interest pressure from producers and electoral pressure from consumers. The special interest pressure is always more "persuasive," so producers always win. Regulations are passed only for the benefit of large firms, not for the benefit or protection of consumers.

This doesn't mean that regulators will be blatant about this. There are two ways to help a producer: Via a direct subsidy or via protectionism. Subsidies aren't good--they encourage new entrants into the market, so producers gain only a short-term benefit. Protectionism, on the other hand, limits entry into the market--regulators favor this method. So we see protective regulations like tariffs, occupational licensing, fees, and so on.

Stigler's reasoning draws heavily on Olson and, to a lesser extent, on Downs. Producers simply organize better.

Main Argument

Stigler proceeds from two primary premises:

  1. The fundamental asset controlled by the state is the power to coerce. Any group that can control how this power is used can profit.
  2. Since we are self-interested actors, we will seek to get the state's coercive power to support out interests. Efforts to do so, however, are costly.

Invariably, large firms win. The logic is Olsonian:

  • Large firms have high benefits from mobilizing. Since they are a small group, and since they are fairly homogeneous, they have no difficulty with collective action problems.
  • Small firms don't organize for political reasons because of collective action problems: low potential benefits.
  • Consumers don't organize because the costs of doing so are high compared to the benefits. Basically, consumers remain rationally ignorant (besides Olson, see also Downs on this point).

Contrast with Capture Theory

Capture theory (or Congressional abdication theory) says that the industry captures all the rents, and it neglects any supply-side (i.e. regulator) role. Stigler doesn't pay as much attention as he could to supply (see comments below), but does pay enough to show that regulators capture some of the gains.

For more on capture theory, see Lowi and Niskanen.

Comment and Criticism

Stigler looks only at the demand for regulation (demand by producers and consumers), large ignoring the supply-side calculus--that is, he ignores the regulator's motivations. He does touch on the supply-side slightly, pointing out that legislatures want political support, campaign contributions, future employment, bribes, and so on. But by underemphasizing the supply side, he ends with an unrealistic conclusion that consumers always lose. Peltzman's (1976) modification of Stigler's model corrects this problem, resulting in far more realistic predictions.

Stigler also treats the "regulator" as a black box. Later research has unpacked this black box into Congress, bureaucratic agencies, the president, and so on, showing that interactions within this "regulator" might be just as important as the relationships Stigler emphasizes.