|Peter Boettke|
Andrei Shleifer has a new working paper on "Efficient Regulation." He explores the idea that the pervasiveness of regulation is not due to market failures, but due to a failure of the court system.
In a series of papers over the past decade, Shleifer has sought to examine the trade-offs involved in resolving disputes through regulation or the courts. These papers would include his "Coase and the Coaseans" as well as "The Rise of the Regulatory State". One way to think about the argument developed in those papers, is is to draw a 2x2 matrix depicting the empirical state of the world:
|
|
Competent
Regulators |
Incompetent
Regulators |
|
Competent Judges |
Market Discipline |
Market Discipline |
|
Incompetent Judges |
State Intervention |
Market Discipline |
Only the cell which depicts a world where we have incompetent judges (e.g., corrupt judges), but competent regulators (read neither corrupt nor ill informed) would the reliance on state regulatory intervention be the least cost method of disciplining the behavior of market participants.
The way I read the most recent argument is that the inefficiencies in the court system are more pronounced then my 2x2 matrix implies. Rather, the inefficiencies are deep in the legal structure and produce not dispute resolution in a cheap, predictable, and impartial manner, but instead in an expensive, unpredictable, and biased manner. The self-regulation of the market simply is not that reliable when contracts are subject to unpredictable interpretations and extremely costly to enforce. In that empirical reality, the scope for regulatory action increases, and that expansion is efficient.
Shleifer's analysis, like that of Coase's, forces us to think about comparative institutional analysis. There are trade-offs associated with institutional choice. In this current paper, while not ignoring the risks of regulatory capture and the rent-seeking costs associated with political entrepreneurship, these political costs are not emphasized. His analysis is focused on the costliness of courts and the reality that we do not live in a world of perfect courts. But as Shleifer knows, we don't live in a world of perfect politics either.
Despite my more pessimistic conclusion about the possibility of efficient regulation, Shleifer proves again in this paper, in my opinion, that he has more substance per page than any other top-tier economist of his generation. And the framework of analysis he provides for study is one that graduate students can easily work within to produce fascinating empirical studies on both the operation of the court system and regulatory agencies.
My pessimism about formal regulation, but optimism about self-regulation is laid out in a new working paper discussing the lessons I think we should draw from Lin Ostrom's work on governing the commons and cultivating citizens.
