Capturing Regulatory Reality: Stigler’s The Theory of Economic Regulation

This paper offers a retrospective assessment of economist George Stigler’s classic article, The Theory of Economic Regulation. Stigler argued that regulation is a product that, just like any other product, is produced in a market, and that it can be acquired from the governmental “marketplace” by business firms to serve their private interests and create barriers to entry for potential competitors. He challenged the idea that regulation arises solely to serve the public interest and demonstrated that important political advantages held by businesses can contribute to industry capture of the regulatory process. Although his argument was largely based on the theoretical framework he developed, Stigler also illustrated his insights with empirical evidence from state-level regulatory schemes, including trucking regulation and occupational licensing. In this paper, we re-examine Stigler’s argument and analysis more than forty years later. Despite the great value of Stigler’s work in illuminating the problem of regulatory capture, his influential article nevertheless did exaggerate the power of business over regulators, as he suggested the existence of nearly an iron law of business control that clearly does not exist. He also confusingly conflated elected legislators with more independent agency bureaucrats, failed to rule out the public interest theory of regulation, and relied in part on unrealistic assumptions about the political economy of regulation. Notwithstanding these shortcomings, Stigler’s ground-breaking theory holds enduring value to both scholars and policymakers, and his innovative use of economic principles and empirical analysis provides a much-needed template for the further study of regulation and regulatory institutions even today.