Regulation and Expressive Voting (original) (raw)

Regulation and the Theory of Legislative Choice: The Interstate Commerce Act of 1887

The Journal of Law and Economics, 1989

The positive theory of regulation has focused primarily on the formation and participation of interest groups (see Noll and Owen, 1983). While necessary, the focus on groups is not sufficient to understand regulatory outcomes. Explaining the economic effects of regulation also requires mastering the effects of political institutions that influence and constrain the actions of politicians. In this paper, we argue that federal regulatory outcomes cannot be explained apart from congressional institutions. The specific pattern of benefits is directly tied to these institutions and is determined by two factors. The first concerns how the interests are represented within the Congress, and especially on the relevant committees with policy responsibility or jurisdiction. Committees are important because they enfranchise their members with important powers, notably, veto power over the proposals made by others. The second factor is bicameralism, the need to build majority support in two separate chambers. 1 This is relevant to the extent that interest groups are not distributed identically across both houses of Congress, for example, if different groups hold veto power in different houses. Put simply, our thesis is that specific interests are advantaged in the legislative process, not because of some "organic" bias in favor of groups, but because of the representation of these groups within the political institutions. In order to make this point, we provide a model of political choice and demonstrate its applicability to the choice of complex regulatory legislation. Our method is constructive. We show how our model helps explain why one out of a range of policies becomes the final legislation. We develop our ideas in the context of the inception of the first major regulatory agency, the Interstate Commerce Commission (ICC), in 1887. The inception of the ICC provided neither a cartel mechanism for the railroads (as with the pure capture view) nor solely a mechanism to correct market abuses by the railroads (as with the public interest theory). Rather, it provided an array of benefits, some to railroads and some to non-railroad interests, notably the so-called shorthaul shippers. Our analysis contains three components. First, we develop a theory of legislative choice. Second, we provide a detailed review of the proposed regulatory instruments and study their effects, thereby offering considerable insight into the Act's beneficiaries. Third, from the analysis of the incidence of various bills, we derive testable implications about how congressmen could be expected to vote between different alternatives. Because proposals differed in their expected economic effects and had different implications across geographic regions, tests about the expected economic impact of the legislation can be performed by studying the voting decisions of representatives of these regions. We then perform these tests using logit analysis. 2 The empirical results support the interpretations derived from the analysis of the regulatory instruments and lead to the following conclusions. The final bill did not provide railroads with a cartel manager; rather, it was a compromise among many contending interests. Organized antirailroad groups gained important restrictions on railroad pricing in some markets; the railroads benefited by earning supracompetitive profits in others. The net effect of regulation on railroad profits was small but positive. Finally, the most important effect of the ICA seems to have been a transfer of wealth among customer classes, specifically, from longhaul to shorthaul shippers. This paper proceeds as follows. Section I develops an approach to modeling the economics of railroading and relates this to previous work. It also shows why previous tests of the impact of ICC have not resolved the issue of who benefited from the ICC. Section II focuses on the political economy of interest groups and develops the multi-interest group perspective necessary to study the problem. Section III presents our model of legislative choice and derives its implications for regulation. Turning to the political battle over regulation, sections IV and V reveal that the politics parallel the economic distinctions developed in section II. Section VI tests the hypotheses concerning economic impact using logit analysis of congressional voting. SECTION I. A REVIEW OF RAILROAD ECONOMICS Railroads have attracted the attention of economists, historians, and political scientists for decades. The extensive literature allows us to make the following characterization. The railroad system, like most networks, was actually a complex set of interrelated markets (Meyer et al., 1959, Friedlaender 1972). For our purposes, we distinguish two important categories of markets, the socalled shorthaul arid longhaul markets, defined as follows. Longhaul markets are those served by several railroads and are naturally competitive. The railroads attempted to cartelize these markets. The cartels, though imperfect, meet with some success (see MacAvoy 1965; Porter 1983; and Ulen 1982). Shorthaul markets, on the other hand, are served by a single railroad and are naturally monopolistic. They are characterized by discriminatory pricing. These two markets are illustrated in Figure 1. This figure also shows that shorthauls are often a segment along a particular longhaul route. Thus, out of Chicago, there are four major competing roads to the east coast (according to Ulen, 73 percent of all dead freight out of Chicago is bound for Europe). However, along each of these routes are a series of shorthaul monopoly routes. Prices along these tend to be significantly higher than the price charged for the longhaul of which 3 they are a part. This pattern of pricing resulted in two categories of markets. This implies that the railroad controversy cannot be seen as the railroads against some undifferentiated set of consumers. Railroad shippers were a heterogenous group with diverse preferences over regulatory outcomes. Notably, the pattern of pricing generated two separate sources of political support for regulatory intervention. The railroads sought regulation to improve their unstable private cartels. 4 Shorthaul shippers, on the other hand, sought regulation to alleviate discriminatory pricing. 5 The literature has also provided considerable evidence about the regulatory effects of the ICA, and is nearly unanimous on the following: shorthaul prices declined while longhaul prices increased. This pattern clearly benefited

Public Choice Issues in Social Regulation

Economic Affairs, 1994

The regulatory activity of government is now pervasive, acting like a tax and pushing up costs. Public choice analysis shows that producer and other groups try to capture regulatory control to minimise its impact. Deregulatory trends in the US have been accompanied by the growth of environmental and health and safety regulation both in the US and in the UK and Europe.

Citizens or lobbies: who controls policy

Games and Economic Behavior, 2018

This paper analyses a model of electoral competition with uncertainty on the policy implemented by candidates. I show that this uncertainty can induce risk-averse voters to elect politicians whose policies are biased. I apply these results to a lobbying game, where candidates hold private information about their willingness to pander to lobbies once elected. I show that voters elect politicians who implement policies biased in favor of the lobby. Increasing the probability of non-pandering candidates can increase the effect of lobbying. The model thus demonstrates that uncertainty on the influence of special interests can lead to large effects of lobbying on policy.

Regulation versus Taxation (with A. Alesina)

A. Alesina and F. Passarelli (2013), "Regulation versus Taxation", Journal of Public Economics, (Forthcoming, available online, 16 September 2013)

"""We study which policy tool and at what level is chosen by majority voting in order to reduce negative externalities, such as pollution. We consider three instruments: a rule, that sets an upper limit to the activity which produces the negative externality, a quota that forces a proportional reduction of the activity, and a proportional tax on it. For all instruments the majority chooses levels which are too restrictive when the activity is performed mainly by a small fraction of the population, and when costs for reducing activities or paying taxes are quite convex. However, in case of a rule too restrictive levels are more frequent than in case of a tax or a quota. Even though a tax is in general superior to the other two instruments, the majority may strategically choose a rule in order to charge the minority a larger share of the cost for the externality reduction."""