This chapter discusses the three themes of economics research on regulation. The first and oldest deals with market failures and the corrective actions that government can undertake to ameliorate them. The second examines the effects of regulatory policies and asks whether government intervention is efficient or more efficient than doing nothing. The third investigates the political causes of regulatory policy. The motivation arises from the disjointness in the first two areas of research: regulation as practiced commonly has been found to be inefficient and to adopt methods that do not appear to be the best choices for tackling their associated market failures. The chapter presents an interpretative survey of the third category of research. It focuses on research that employs the conceptual model and methods of economics—that is, it assumes rational, goal-directed behavior by all relevant agents—that uses economic theoretic discussions to make predictions about political behavior and, where relevant, that employs the methods of testing theoretical hypotheses that economists commonly employ. Regardless of the motives of political actors, an essential ingredient to a theory of regulatory policy when the Coase Theorem fails is the way political officials control agencies. Whether the aim of regulation is to maximize efficiency or to transfer wealth to a special interest, politicians face a principal agent problem in trying to assure reasonable bureaucratic compliance with the objectives behind a legislative mandate.
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