Sunday, December 18, 2011

Why is Regulation so Common?

The United States has many regulations both on a state level and at the national level.  I recently wrote that one way to give tax cuts to businesses without diminishing government tax revenues and therefore increasing the debt was to diminish regulatory taxes.  Most of the groundbreaking literature (Stiglitz & Posner) on the economic effects of government regulation comes from a post-hoc point of view.  Andrei Shleifer wonders, in his forthcoming (February 2012) book, The Failure of Judges and the Rise of Regulators, why do we have so many regulations?

The M.I.T. Press describes it: "Government regulation is ubiquitous today in rich and middle-income countries - present in areas that range from work-place conditions to food processing to school curricula - although standard economic theories predict that it should be rather uncommon.  In this book, Andrei Schleifer argues that the ubiquity of regulation can be explained not so much by the failure of markets as by the failure of courts to solve contract and tort disputes cheaply, predictably and impartially.  When courts are expensive, unpredictable, and biased, the public will seek alternatives to dispute resolution.  The form this alternative has taken throughout the world is regulation."

This book is based on several papers that he has written over the years.  Here is one that he wrote in 2001 with Edward Glaeser titled, "The Rise of the Regulatory State."

Andrei Shleifer is an economics professor at Harvard University.  He is most known for his work on law and finance.  He gained some notoriety during a scandal involving USAID, Harvard, and programs to transition Russia to capitalism during the 1990's.  This recent work on the origins and reasoning behind the current regulatory situation in the U.S. and around the world seems like important additions to the study of regulatory economics.

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