Stigler’s Interest-Group Theory of Regulation: A Skeptical Note

As a rule, regulation is not acquired by “the industry,” and it is not designed and operated primarily for its benefit. The mechanisms behind the promulgation of regulations are multiple, and almost all of the time, it greatly matters whether regulators believe that regulations will, all things considered, have good consequences. In terms of understanding the sources of regulations, it would therefore be valuable to obtain more clarity about the sources of regulators’ beliefs—about what information they receive and find credible, and why.   

Editor’s note: In 1971, George Stigler published his article “The Theory of Economic Regulation.” To mark the 50-year anniversary of Stigler’s seminal piece, we are launching a series of articles examining his theory’s past, present, and future legacy. The series is part of the Stigler Center’s George Stigler 50 Years Later symposium.

Consider the following regulations:

1. In 2010, the Department of Justice issued new regulations under the Americans with Disabilities Act. The regulations established requirements for facilities such as detention facilities and courtrooms, amusement rides, boating facilities, golf and miniature golf facilities, swimming pools, and play areas.  

2. In 2011, the Department of Transportation issued a final rule, the first in a series of “passenger protection rules.” Among other things, the 2011 rule (1) enhanced protections afforded passengers in oversales situations, for example by increasing the maximum denied boarding compensation airlines must pay to passengers bumped from flights; (2) required carriers to notify consumers of optional fees related to air transportation and of increases in baggage fees; (3) prohibited post-purchase price increases; and (4) required carriers to provide passengers timely notice of flight status changes such as delays and cancellations. 

3. In 2011, the Department of Transportation and the Environmental Protection Agency issued a final rule, calling for new labels on motor vehicles. Among other things, the new labels offer information about annual fuel costs, about greenhouse gas emissions, and about five-year costs or savings, compared to the average new vehicle. 

4. In 2012, the Department of Justice issued a final rule, containing new standards designed to reduce sexual abuse in confinement facilities. The standards are numerous, and they cover prevention, detection, and responses to sexual abuse. With respect to detection, the standards required, among other things, that facilities (1) inform inmates how to report sexual abuse; (2) provide multiple channels for inmates to report such abuse, including by contacting an outside entity; (3) allow inmates to report abuse anonymously upon request; and (4) provide a method for staff and other third parties to report abuse on behalf of an inmate.

5. In 2014, the Department of Transportation issued a final rule, mandating rearview cameras in new motor vehicles. The rule was strenuously opposed by automobile companies. It was projected to impose more than $600 million in annual costs.

6. In 2015, the Environmental Protection Agency issued a final rule, designed to reduce greenhouse gas emissions from stationary sources. The rule was opposed by numerous electricity providers, who vigorously objected to the costs of the rule.

7. In 2021, the Department of Homeland Security issued an interim final rule requiring the US Postal Service to collect advance electronic data (AED) on certain packages arriving from other nations. The main goal of the rule was to reduce the supply of opioids, and it was also expected to reduce the arrival of other unlawful goods into the United States.

These are but a few examples of thousands of regulations in which I have had some involvement while in government as Administrator of the Office of Information and Regulatory Affairs (OIRA) from 2009 to 2012 and as Senior Counselor and Regulatory Policy Office at the Department of Homeland Security in 2021. Experience with the federal regulatory process makes it exceedingly hard to credit George Stigler’s claim, in his influential 1971 article, that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.” That claim is false, even a kind of fairy tale (albeit a Grimm one). 

To be sure, Stigler was onto a real phenomenon, and there would be much less ground for objection if Stigler had not spoken of “a rule,” had spoken less universally, and had said, for example, that “in some important cases, regulation is acquired by the industry and is designed and operated primary for its benefit.” (Even so: What does “is acquired by” mean? I will get to that.) 

Stigler urged that a “major public resource commonly sought by an industry is control over entry by new rivals.” Hence he proposed “the general hypothesis: every industry or occupation that has enough political power to utilize the state will seek to control entry. In addition, the regulatory policy will often be so fashioned as to retard the rate of growth of new firms.” He drew particular attention to the “class of public policies sought by an industry” that “is directed to price-fixing. Even the industry that has achieved entry control will often want price controls administered by a body with coercive powers.”

Is this really meant as a general theory of regulation? Suppose that an environmental regulator takes steps to reduce greenhouse gas emissions from power plants, or to control levels of particulate matter in the ambient air. Should we say that air pollution regulation was acquired by the industry and operates for its benefit? Always? Most of the time? Once in a while? To begin to make sense of any such claim, we might want to distinguish between necessary and sufficient conditions. Is it a necessary condition that “the industry” wants the regulation? Is that condition sufficient? I suggest that in the examples with which I started, it is exceptionally difficult to argue that support from “the industry” was either necessary or sufficient. (And what’s “the industry”? The answer is not at all obvious. There are often a lot of industries, and within any single one, the goals of industry members might not be uniform.)

The better explanation is that in each of these cases, regulators (and I was one of them) concluded that the new regulation was a good idea, in the sense that in their view (and mine) it would have net benefits (however we make that assessment). In most of the cases, those who were regulated affirmatively opposed the regulation. They did not welcome it, or argue on its behalf.

Stigler was in the grip of a picture, provided by examples that were especially salient to him. He was much concerned with occupational licensing, where it is entirely plausible to argue that supposedly public-spirited restrictions are favored and often sought by those seeking to freeze out new entrants. If a city bans Uber, it might well be because taxi companies are able to organize in support of the ban, to the detriment of the public as a whole. If a city restricts the number of landscape architects through licensing restrictions, it might be making an effort to authorize a kind of cartel. Stigler drew attention to “cartels in the closet,” and he was certainly right to notice the phenomenon. But in my view, his influential essay was less empirical social science than literature, a kind of narrative.  

This claim is not meant to deny that Stigler did notice a real phenomenon, and to some extent, he documented it. No one can doubt that ostensibly public-spirited regulation is made possible by, or facilitated by, powerful interest groups. If regulators impose costly regulation on coal companies, solar and wind companies might applaud, and the same might be true of natural gas companies. We could imagine airlines that already provide passenger protections; they might favor a regulatory mandate to that effect as a way of reducing competition (as when companies that do not provide those protections offer lower ticket prices). If some companies provide rearview mirrors voluntarily, they might want to restrict competition by seeking a regulation requiring all companies to do what they already do. This kind of thing certainly does happen: Companies seek regulation as a way of preventing competitors from underselling them along some important dimension. (Note we cannot say, from that fact, that the resulting regulation reduces social welfare. It might improve it. To know that, we need to know something about costs and benefits.) 

But let me return to my main point. Stigler offered, but did not adequately defend, the proposition that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.” That proposition is false. As a rule, regulation is not acquired by the industry, and it is not designed and operated for its benefit (primarily or otherwise).

There is an additional problem: What is meant by the term “acquired by”? Regulations are not bought and sold. To understand what Stigler had in mind, we should distinguish—as Stigler did not—between legislation and regulation. In the context of legislation, the claim might be that “the industry” pressures legislators to favor regulation, perhaps through campaign donations, perhaps by threats to donate to opponents. But was the Cameron Gulbransen Kids Transportation Safety Act of 2012, which led to the rear visibility regulation, produced in this way? That would be an absurd claim. Is that the best explanation of the Synthetics Trafficking and Overdose Prevention Act of 2018, which led to the opioid regulation? That would also be absurd. 

In the context of regulation, we also need to specify the mechanisms. “The industry” can and certainly does ask for meetings, in which it might argue for and against various approaches. We could imagine efforts to impose pressure on the executive branch, with “the industry” urging, for example, that it will give money and support to an opposing presidential candidate, or mount a public relations campaign, or seek to energize activists and journalists. And it is certainly true that in some cases, “the industry” does make threats or promises of this kind—most often, by the way, to argue against regulation, not to argue for it. 

But it is not clear whether any of these possibilities justifies the use of the term “acquired by.” Perhaps we could say that if a threat or a promise gets an agency to issue a regulation that it would not otherwise issue, we have an example of what Stigler had in mind. Surely there are such examples, but they are not “the general rule.” I conclude that the success and influence of Stigler’s argument owed a great deal, not to its accuracy, but to its iconoclasm, its sense of knowingness, its smarter-than-thou, cooler-than-thou cynicism (appealing to many), its mischieviousness, and its partial (!) truth.

Let me end on a positive note, meant to suggest a direction for future work: If regulators are mandating reductions in greenhouse gas emissions, calling for new safety technology in cars, or requiring passenger protections in connection with air travel, it is highly likely that they believe that the relevant regulations are a good idea, all things considered. They might well believe that the regulations would have net benefits, as required by Executive Order 12866 and Executive Order 13563. They might believe that the regulations are justified on grounds of fairness, or that they would be desirable on distributional grounds. 

But why, exactly, do they believe such things? There are two main answers. The first involves the information they receive: What do they learn, and from whom do they learn it? In some cases, “the industry” is relevant; in other cases, journalists matter; political parties, public interest groups, think tanks, and academics might matter as well. Some regulators live in echo chambers; others do not. In many cases, we might well be able to speak of “epistemic capture,” which occurs not when regulators are literally pressured (threatened or promised), but when what they believe to be true is only a subset of the truth, or not true at all.

The second main answer involves the motivations of the regulators themselves. What do they want to believe, and what do they want to dismiss? To see the importance of this question, consider a key moment in the development of the screenplay for Return of the Jedi, the third Star Wars film, George Lucas, the mastermind of the series, had a heated debate with his collaborator Lawrence Kasdan. Kasdan strongly advised Lucas, “I think you should kill Luke and have Leia take over.” Lucas promptly rejected the idea. Kasdan responded with a heartfelt claim about the nature of cinema. He explained to Lucas that “the movie has more emotional weight if someone you love is lost along the way; the journey has more impact.” 

Lucas’s response was quick and unequivocal: “I don’t like that and I don’t believe that.”  Notice the sequence here: not liking precedes not believing and helps account for it. As for the plot of Star Wars movies, so for regulations: Whether people believe that depends on whether they like that. Understanding what people end up hearing and crediting, and also what they want to hear and credit, would enable us to make real progress in specifying the mechanisms that lead to regulation.