Global Economic Development Class

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Global Economic DevelopmentClass 25
Regulation Questions Does regulation enhances or
slows down economic growth? Regulation and
development? Definition of regulation? More
precisely, what types of regulation enhance
growth and what types hinder growth?
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Regulation in America is pervasive. A traditional
economist model would predict then that economic
activity would be harmed and reduced. Instead, we
have plenty of economic activity. How can we
explain this? Difference between regulation
bottom-up and regulation up-bottom.
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• Shleifer Understanding Regulation
• Main theory (all public policy books are written
  under this paradigm)
• Market failures are corrected by regulations put
  forth by benign and capable governments.
• Example monopoly public goods
• Criticisms
• Markets take care of initial market failures.
• Example safety regulations in labor and cars,
  neighbours conflicts
• Main idea the domain of market failure or
  socially harmful conduct that is not
  automatically controlled by impersonal forces of
  competition is extremely limited. You can divide
  economists and the debates as seeing
  externalities as limited (Friedman, Prescott) or
  pervasive in the economy (Krugman, Stiglitz).
• 2. Private litigation can solve conflicts
• Example courts (tv programs)
• 3. Government regulator are not benign nor
  capable.
• Example regulator captured by regulated
  telephone industry.

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• Critiques of the critique
• Excessive confidence in private orderings and in
  courts. There can be anarchy, law of the more
  powerful or rich. If government can fail, why not
  courts?
• Empirical level today we live in a much
  richer, more benign, but also more regulated
  society, and that as consumers we are generally
  happy with most of the regulations that protect
  us.

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• New theory enforcement theory of regulation
• Main issue two social costs, disorder and
  dictatorship, and their trade-off.
• Figure 1
• Four distinct strategies to enforce some socially
  desirable end
• market discipline (competition)
• Example entry of firms (licenses)
• private litigation (courts and private contracts)
• Examples injured employees sue employers
• Intermediate step formalize legal procedure and
  make judges employees of the state to assure
  accuracy, and to prevent the subversion of
  justice. Private enforcement of public rules is
  a highly efficient strategy of enforcing good
  conduct in many situations.

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• 3. public enforcement through regulation
• Example securities regulation (the power of big
  firms and small investors is too disimilar!)
• 4. state ownership
• Example prisons, military, police, etc.
• Inefficient institutional choices
• incentives of politicians
• history (colonial transplantation)
• Conclusions
• faced with a social end, ask the question which
  institutional choice is the most efficient way of
  solving it?
• different social ends, different answer

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Mulligan and Shleifer The supply of regulation
and the extent of the market t type of dispute
that might occur, t between 0 and infinity The
lower t, the more frequent the dispute f(t)
density function (decreasing) likelihood that a
randomly chosen dispute is of type t N
population size b value of solving a
dispute bNf(t) value of having regulations of
type t Costs of regulation of type t s(t) rho
cNf(t) fix cost (new bureau, drafting of
regulation, etc.) variable cost (courts)
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• Conclusions
• regulation might be an efficient solution for a
  social problem
• case by case, we have to distinguish when
  regulation is efficient
• we need to revise the regulation as environment
  change