Review: Moving Beyond Cycles of Regulation, Deregulation & Reregulation

The endless cycle of government regulation is explored in a new book, Regulation, Deregulation, Reregulation (Advances in New Institutional Analysis) by Michel Ghertman and Claude Menard. Contributors bring an international perspective, touching on a myriad of industries. While not directly focused on developing a post-subprime regulatory framework in the financial industry, the book does reflect the latest thinking by a respected group of scholars for understanding theory and practice in regulatory approaches.

For example, the research of Andres, Guasch and Azumendi develops indexes of regulatory governance from cross-country data and shows that regulatory involvement improves results in utility performance. Another study by Delmas, Russo, Montes-Sancho and Tokat finds that deregulation has a negative impact on efficiency and a positive impact on the provision of renewable energy. ne way to create willingness to pay for public goods is to bundle them with private goods. Consumers are willing to pay a premium for non-toxic cleaners because they see the likelihood of direct impacts on their own health.

More on target for those concerned with reform of the financial industry, Romano discusses how SOX’s use of a “one-size-fits-all” approach is oblivious to the microanalytic approach of firms matching governance structures and processes to specific organizational developments and requirements. Rulemaking expansions often occur after business crises galvanize public opinion and action by legislators around sometimes ill-conceived compromise solutions supported by powerful and vocal interest groups. In contrast, refinement of poorly conceived regulatory schemes generally takes many years and requires substantial research.

If nothing else, be sure to read the essay by Ghertman who outlines Stigler’s 1971 article, the “Economic Theory of Regulation,” which recognized that many rules are advocated by incumbent firms as barriers to entry. Stigler generally favored market-oriented deregulation… the road we took for decades. Ghertman goes on to discuss refinements offered by subsequent scholars that discuss variables such as group cohesion, political balance, and unintended incentives and transaction costs.

Explanations of movements away from and back toward a dominating policy paradigm (regulation or deregulation) benefit from the dynamic properties of political science for third order changes (the paradigm), the dynamic properties of transaction cost theory for second order changes (regulatory instruments), and the behavioral theory of the firm and the contractual design view for first-order changes (regulatory mechanisms).

Transaction cost economies are better grounded than a simple Stigler-based assertion that “regulation (or government) IS the problem” would warrant. Finding appropriate proxies to measure transaction attributes is problematic, especially across industries and jurisdictions, but is essential. We need to focus more on ex ante choices and less on ex post empirical tests if we are to move beyond the cycle of regulation, deregulation and reregulation.

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