CH2 REGULATION AS CAPTURED BY PRIVATE SECTOR ACTORS

Question 1

PLAN

Answer 1

I. Foundations : firm interests and regulatory capture
A. Transaction costs - WILLIAMSON
B. Measures that regulate and intervene in the market dynamic
- Contracts - NORTH
- “regulatory capture” - STIGLER
II. Expansion : resistances to regulatory capture
- Limits to STIGLER’s analysis - empirical tests - LEVINE
- Theoretical refinements - TIROLE, LAFFONT
III. Application : the environment damaged by growth coalitions
A. “Treadmill of production” - SCHNAIBERG
B. “Growth coalitions”
- Foundations : urban sociology - LOGAN, MOLOTCH
- In rural context - RUDEL

Question 2

‘New institutional economics’

Answer 2

Put the emphasis on the different types of costs that are associated with market transactions

Question 3

Adam SMITH

Answer 3

The market tends to provide efficiency

Question 4

Transaction costs

Answer 4

Oliver WILLIAMSON (1975)

• Information costs
• Bargaining costs
• Policing and enforcement costs
• -> Market is deeply imperfect : strategic behaviours and suboptimal markets to reduce transaction costs

Question 5

Measures that regulate and intervene in the market dynamic

Answer 5

• contracts (NORTH)

- “regulatory capture” (STIGLER)

Question 6

Contracts

Answer 6

Douglas NORTH (1991)

Contracts are
- useful : reduce uncertainty, less future transaction costs
BUT
- suboptimal : doesn’t allow to always get the best price

Market = set of suboptimal contracts

Regulation : necessary to assure that contracts will be respected.

Question 7

“Regulatory capture” - thesis and author

Answer 7

STIGLER (1971) (doesn’t use this term himself)

• Regulation is not for the general interest but an interaction between economical and political actors driven by their own interests
• Regulation is a product as any other
• Government products : coercion, entry regulations
• Role of firms :
• -> financial incentive for politicians (big firms potential providers of funding of political campaigns)
• -> not many incentive to listen to voters (they are not interested in regulation matters)
• Regulation tends to serve the interest of a limited number of dominant firms, political actors instead of society
• Empirical evidences
• -> Trucking industry in the USA
• -> State licensing of occupations

Question 8

Regulatory capture - definition

Answer 8

Form of government failure that occurs when regulatory agency, created to act in the public interest, instead, advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.

Question 9

Limits to STIGLER’s analysis

Answer 9

Michael LEVINE (1981)
--> actor's interests in regulation are more complex than STIGLER's theory
Example of US Airline Industry : in the 70s, deregulation but the citizens ere broadly in favour of the regulations so resistance to deregulation => regulatory capture did not occur.
- weight of the perceived 'public interest' : sometimes politicians may act in the public interest, to be on the side of the citizens

Question 10

Theoretical refinements of regulatory capture

Answer 10

TIROLE, LAFFONT (1993)

• Game theory : regulation as an interaction of multiple actors and interests (State, independent regulatory agencies, firms…)
• Key role of asymmetric distribution of information: firms tend to know more than the State about their sectors

Consequences :

• multiple contract offers
• regulation leaves margin to firms, Firms can influence the terms of regulation
• Mix of private and public interests: bargaining between the State and the firms

Question 11

The environment damaged by growth coalitions : 2 approaches (titles)

Answer 11

• “Treadmill of production” - SCHNAIBERG
• “Growth coalitions”
• -> LOGAN, MOLOTCH
• -> RUDEL

Question 12

“Treadmill of production”

Answer 12

Allan SCHNAIBERG (1980)

Context : post WW2

Assumption: the economy generates ecological disorganisation by 2 mechanisms :

• Ecological withdrawals
• Ecological additions

Analysis :

• Industrial activity intensifies and damages the environment
• Because convergence of interests in growth : the State sees the interest of big firms as similar to its interest
• Regulation favourable to firms

Treadmill : the economy runs even faster to stand still : it produces ever more but without increasing general well-being and eventually even decreasing well-being by negatively impacting the environment.

Question 13

“Growth coalitions” : urban sociology

Answer 13

LOGAN, MOLOTCH (1987)
The expansion of suburbs because of promotion of local growth by pro growth associations, governmental units and entrepreneurs such as land owners, developers, real estate firms
Profit from sale of properties

Question 14

“Growth coalitions” : rural context

Answer 14

Thomas RUDEL (2009) - explaining deforestation in the Amazon

The reasons for deforestation change overtime :
- After WW2 : demography (better health system and less child mortality, population settle down and have children, demands for land to build houses and farms) + politics (local insurgencies –> the States sponsored new land settlement schemes to get greater control over these areas)
- From the 1980s : less state involvement in these areas (because urbanisation) + international criticism BUT increase of deforestation. BECAUSE deforestation driven by local growth coalitions of actors that have an interest in deforesting (land owners, loggers, bankers, politicians) –> building new, private roads + passive and permissive State (local economical development is good for national economics)
HOWEVER : existence of counter-coalitions : indigenous representatives, environmental NGOs = shared interests in protecting nature. Creation of national parks, may result in the politics with creation of protected environmental areas for example.