The Problematic Incentives of Government Regulation

Presentation by Prof. Howard Baetjer

Econ 640, April 21, 2009

Incentives in government regulation

• Kirzner assumes that regulators are well-intended—that they want what is best for the general public.

• Here we relax that assumption. (See Kirzner p. 445)

Contrast the incentives

Unhampered market

• Private ownership

• Freedom of contract

• Regulation by market discipline

Government intervention

• Common ownership

• Restriction of freedom to contract

• Regulation by bureaucrats

Hairdresser licensing

• What is its avowed purpose?

• How does it work -- what are the institutions?

• What groups are most affected by it?

• Sharissa’s story

• What are the incentives for licensed hairdressers under this institution?

Hairdresser licensing

• What appears to be the actual purpose of hairdresser licensing?

• Some detail on Maryland’s licensing law

• The capture theory of regulation

• Legal institutions

• Informal institutions

• Market (for profit) institutions

Are there civil society alternatives

to hairdresser licensing?

• Legal institutions – tort liability

• Informal institutions – reputation – word of mouth

• “Time wounds all heels”

• Market institutions– intermediaries that

provide information• salons• beauty schools

(certification)

– information vendors • like Consumer Reports

– insurance companies

Civil society alternatives to hairdresser licensing

• Legal institutions

• Informal institutions• Market institutions

Are there civil society alternatives to pharmaceutical regulation?

• Legal institutions – tort liability

• Informal institutions – reputation

• for all parties • (connected directly to

stock price)

– word of mouth • “Time wounds all

heels”

• Market institutions– intermediaries that

provide information• hospitals • pharmacists• doctors

– information vendors • e.g. Consumer Reports• Underwriters’ Laboratory

equivalent

– insurance companies• for intermediaries• for drug companies

Civil society alternatives to pharmaceutical regulation

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clotsInterleukin-2*treats kidney cancer

Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years

Interleukin-2*treats kidney cancer

Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

3500 deaths

Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

3500 deaths

Misoprotolprevents bleeding ulcers

9 ½ months

AmbuCardioPump**Emergency room CPR device

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

3500 deaths

Misoprotolprevents bleeding ulcers

9 ½ months 8000 – 15000 deaths

AmbuCardioPump**Emergency room CPR device

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

3500 deaths

Misoprotolprevents bleeding ulcers

9 ½ months 8000 – 15000 deaths

AmbuCardioPump**Emergency room CPR device

not approved

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

3500 deaths

Misoprotolprevents bleeding ulcers

9 ½ months 8000 – 15000 deaths

AmbuCardioPump**Emergency room CPR device

not approved7000 deaths

annually

Home HIV test

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

3500 deaths

Misoprotolprevents bleeding ulcers

9 ½ months 8000 – 15000 deaths

AmbuCardioPump**Emergency room CPR device

not approved7000 deaths

annually

Home HIV test 5 years

* Already available in Europe** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device

Length of approval delay

Estimated consequences

Thrombolytic therapydissolves blood clots

2 years up to 22,000 deaths

Interleukin-2*treats kidney cancer

Nov. 1988 – May 1992

3500 deaths

Misoprotolprevents bleeding ulcers

9 ½ months 8000 – 15000 deaths

AmbuCardioPump**Emergency room CPR device

not approved7000 deaths

annually

Home HIV test 5 years 10,000 infections

* Already available in Europe** Available in most industrialized nations

Fifty years ago, one in 20 Americans needed a government license to work in their occupation.  Today that number is close to one in three.  In 1981, there were roughly 80 occupations that required a license in at least one state.  Today there are 1,100. 

Source: Institute for Justice:http://www.ij.org/index.php?option=com_content&task=view&id=2668

More examples of the “capture” of regulation by the regulated group

Bootleggers and Baptistshttp://www.perc.org/files/bootleggers.pdf

Texas Interior Designhttp://www.ij.org/index.php?option=com_content&task=view&id=1239&Itemid=165

Maryland Horse massagehttp://www.ij.org/index.php?option=com_content&task=view&id=2203&Itemid=165

Minneapolis taxishttp://www.ij.org/index.php?option=com_content&task=view&id=664&Itemid=165

Campaign finance lawhttp://www.youtube.com/watch?v=8Pu6cT6ICQQ

Minimum wage lawsThe USA and the RSA compared

The special-interest effect:Concentration of Benefits and Diffusion of Costs

Special interest group members

Enjoy concentrated benefits

--individually large benefits--

Each has a strong incentive to

keep informed,

organize, lobby,

spend a lot,

for the policy.

Taxpayers/consumers

Bear diffused costs

--individually small costs—

Each has a weak incentive to oppose the policy

“Rational voter ignorance”

So whose voices do the politicians hear?