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• Stigler focuses on the role of “the state” in
  trade regulation.
  – “the state can and does selectively help or hurt a
    vast number of industries.”
• Certain industries (as a collective of individual
  firms) “acquire” regulation from the state
  – Thus Stigler asserts that regulation is a
    good/service for sale by the state
          Introduction (cont’d)
 Two main alternative views to Stigler:
  1. Regulation is designed to protect the interest of
     the public
      However, there are numerous examples of regulation
       that actually hurts the public
  2. Political process “defies rational explanation.”
      Niskanen, Krueger, Blais & Dion all have shown that
       politicians/bureaucrats are indeed rational
          Introduction (cont’d)
• Stigler argues that industries would rather
  acquire regulation than direct cash subsidies
  – Cash has to be distributed among all firms
  – Regulation is not ‘equally distributable’ across an
• Note that throughout the article Stigler
  emphasizes “industries” rather than individual
 What benefits can the state provide?
• The state has one resource that not even “the
  mightiest of its citizens” has:
  – The power to coerce
     • Taxation, and forced allocation/reallocation of
• Industries may seek one of four policy types
  from the state:
     Types of Regulatory Policies
1. Direct cash subsidy
2. Entry restriction
   Examples:
      Common carrier licenses
      FDIC picking and choosing which banks to insure
 General hypothesis: Every industry that has
  enough political influence will solicit the state
  to restrict entry
        More regulatory policies
3. The state can affect substitutes and
   Examples:
      Butter producers encourage bread production and ask
       for suppression of margarine production
      Airline industry supports federal subsidies to airports
4. Price-fixing
      Difficult to maintain (think about OPEC), but not if the
       state can “price-fix” for the industry by “cartelizing” it
       through regulation.
      When it is possible, obviously leads to “more than
       competitive rates of return” for the firms.
The Political Process Does Impose Some Limitations on
          the Power of the Cartelized Industry

1. The distribution of influence among firms is distorted
      • Without regulation each firm’s influence on the price is proportional to its
        share of output
      • Empirically, smaller firms have more influence than normal. Thus industry
        profit is not maximizzed
2. There are procedural cost of dealing with bureaucracy
      • Administrative/lobbying costs
      • Delays in the system (opportunity cost)
3. Political process allows outsiders to influence decisions
      • Ex. An unprofitable rail-line may be forced to remain in operation by
        citizens residing along the line.
      • Ex. Small groups are able to keep unprofitable TV stations on the air (this
        is less the case since 1987).
  Trucking Regulations Sought by the Railroads

 Uses empirical example of motor-trucking vs. railroad
  industries and use of regulation
 Before 1925, trucking occurred only within cities
   No good interstate or even inter-city roads
   Trucks not equipped for long hauls
 By 1930, huge increase in trucks carrying freight
  between cities
 Railroads saw as threat and sought to curb this
   All states adopted weight-limitations for truck freight
       Texas & Louisiana were explicit examples of railroad industry’s
            Basics of the model
• Developed to determine how weight-limits
  were set:
• X1 (or X2) = a + b·X3 + c·X4 + d·X5
  – Where:
     • X1 and X2 = weight-limit of 4- or 6- wheel trucks
     • X3 = trucks on farms/1,000 agricultural laborers
     • X4 = average length of railroad freight hauls (miles)
     • X5 = % of state highways with high-type surface
     Direction of Expectations in Attempting to
               “Capture” Regulation
1.   If trucks are heavily relied upon by farmers, then Railroads
     will have less influence on the regulation and trucking
     regulations will be less severe.
2.   Trucks compete better with railroads on shorter hauls. So if
     the average haul length is longer, then railroads will have
     less opposition to the trucks and regulations will be less
3.   Heavy trucks may damage the highways, so if states have
     better highways, then trucking regulations will be less
Regression Analysis of State Weight Limits on Trucks
All three variables have correct sign and all three are statistically
   significant (for 6-wheeled trucks X5 is only significant at the
   10% level; all others are significant at least at 5% level).

Industrial demand for governmental powers:
• Not every industry will have a large demand public assistance, but all will
   want money.
• Regulation of new rivals is difficult to control
    – Ex: Restricting domestic servants
• Price fixing is not possible when different goods have different qualities
   and prices.
• Still, nearly all industries will have a positive demand for regulation that
   serves to benefit the industry.
 Costs to Industries Seeking regulation
• The usual flaws in the political markets (all previously
  discussed) are what make regulation-seeking possible, but
  there are still costs to the industry.
• Although costs of obtaining beneficial legislation likely
  increase with firm size, they do so at lower rate. Thus, vary
  small industries may be excluded form beneficial legislation.
• Those who seek political power must go to the right political
  party in order to gain what they need.
• Must be prepared to pay votes and resources.
• Great ¶ on why politicians are mostly lawyers and have ties to
  financial institutions (pg.13).
            Occupational Licensing
• Possible use of the political process to improve
  the economic circumstances of a group.
• Effective barrier to entry
• Characteristics that influence ability to secure
  political power:
   –   Size of occupation
   –   Per capita income of the occupation
   –   Concentration of occupation in large cities
   –   Presence of a cohesive opposition to licensing
Statistical Analysis of the Licensing of Select Occupations by State


   -1 dependent variable which is, “first regulation of entry into the occupation
   -2 independent variables
            i. the ratio of the occupation to the total labor force
                       (in the census year nearest the median year)
            ii. The fraction of the occupation found in cities over 100,000 in that same ye

   -example occupations: beauticians, architects, barbers, etc.

                                                          1953 barbers license
Figure 3
         size of urbanization of occupation relative to labor force: -0.450 (t=0.59)
         urbanization                                                :-12.133(t=4.00)

*Thus urbanization is more strongly associated than size of occupation with licensure*

-Stigler goes on to explain that the results are not very “robust” and explains how the
          crudity of the data may be large source of these disappointments

         -the lack of data due to use of consensus years near median year makes the
                   cruder analysis

-in general, the larger occupations were licensed in earlier years
         -Veterinarians were the only occupation used in the sample that had a defined
                    set of customers (livestock farmers)
         -licensing came later in those states with larger numbers of livestock rather than
                    rural places
Comparisons Within Occupations
(market size)
-as it is impossible to organize an effective labor union in only
 one part of an integrated market, it is impossible to regulate only
 one part of the market.
         -ex. Junior Business Executives
         -if executives in one state were to organize, their effects
         would be minimal
         -if salaries went above competitive level, employers would
         search elsewhere
The comparison between licensed and unlicensed occupations is consistently keeping
up with Stigler’s expectations:

1. The licensing occupations have higher incomes

2. The membership of licensed occupations is more stable

3. The licensed occupations are less often employed by business enterprises

4. All occupations in national markets (college teachers, engineers, scientist, accountants)
   are unlicensed or partially licensed

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