The Political Economy of Government Regulation


Spring 2006

Professor Daniel Carpenter

Department of Government

Faculty of Arts and Sciences

Harvard University



What Part of This Page Do You Want to Use?

Contact the Professor


Professor Carpenter's Contact Information

Office Hours & All Student Meetings

Where: Center for Government and International Studies [CGIS] Cafe

Office Hours: Thursday 1 PM-4PM (otherwise by appointment)


Discussion Papers & Assignments

Homework Assignments



Course Description

A broad ranging and theoretically driven examination of the role of government in regulating economic markets and industries. We shall begin with an introduction to several schools of regulation theory (public interest, capture, informational) and then move to consider four different policy domains of federal regulation: energy and environmental, transportation, workplace and consumer safety (OSHA, CPSC), and health and pharmaceuticals (FDA, EU). In each of these "empirical" segments, we shall consider the following questions. How did we get the regulations that we have? What are the effects of these regulations? Who wins and who loses under them? Do these regulations achieve their stated goals, and how would we know if they did or did not? What are the properties of optimal regulatory policies in these areas (if any exist at all)? Have recent regulatory reforms been productive, socially efficient, fair? If not, how might they be amended? Coursework will include weekly readings, a set of papers/memos and problem sets, and a research project (possibly joint with other students) to be completed by the end of the semester. Where possible, students will be given access to data on the effects of regulation in these domains, or to test hypotheses of the political creation, effects, and operation of these programs.


Course Outline (& Themes)

Weeks 1 & 2: Introduction to Theories of Regulation
    • The Public Interest Theory of Regulation
    • Capture and Rent-Seeking Theories of Regulation
    • The Informational Theory of Regulation

Weeks 3 & 4: Regulation of Energy

  • Is there such a thing as a natural monopoly?
  • How do government regulators overcome information asymmetries (Baron/Myerson, Baron/Besanko) in regulating monopolies?
  • Deregulation: What are the causes of the current energy crisis in California?
  • How do FERC licensing decisions affect individual firms and energy consumers?

Weeks 5 & 6: Environmental Regulation

  • How can we explain the political creation of environmental regulation when its benefits are diffuse, its costs concentrated?
  • Has the Clean Air Act really cleaned the air? How would we know?
  • Have the CAFE standards cleaned the air? Again, how would we know?
  • Do environmental regulations have adverse employment and investment effects? How would we know?
  • How much does a change in presidential administration or congressional majority change environmental enforcement? What are the implications of political volatility for the effectiveness of environmental regulation?

Weeks 7 & 8: Transportation Regulation

  • Did federal regulation hasten the demise of railroads in the U.S., or would it have happened anyway (and as quickly)?
  • Has regulation of trucks favored light trucks and SUVS over larger ones?
  • Does federal and state licensing of carreirs present strong entry barriers that hinders competition in the freight industry?
  • Do recent railroad mergers portend a re-monopolization of the rail industry? Did large firms buy these mergers through the political process (or buy a lack of opposition)?
  • What were the economic effects of the elimination of the Interstate Commerce Commission?


Weeks 8 and 9: The Regulation of Workplace and Consumer Safety

  • Are OSHA workplace safety regulations effective? How would we know?
  • Upon whom do workplace safety regulation costs fall?
  • Do workers have incentives to invest in safety? If so, what sorts of regulations allow for optimal worker safety investment?
  • Are product recalls an effective way of protrecting consumers from information asymmetries in product safety, or are announcements and warnings a better idea?
  • Do federal requirements for warning labels and product announcements lessen the incentive for consumers to become informed about product hazards?
  • Who pays when products are unsafe? The firm itself? the entire industry? How ought a regulatory policy deal with this problem?

Weeks 10-13: Pharmaceutical and Medical Regulation: the FDA and the EU

  • Has FDA regulation reduced pharmaceutical productivity and enhanced large-firm advantage?
  • Would these effects have happened anyway?
  • How do politicians affect FDA drug regulation? Does their influence benefit small or large firms more? Does it benefit some disease sufferers more than others?
  • Do FDA regulations affect the way that firms develop new therapies? How, and how would we know?
  • Is the spate of recent drug recalls evidence that the speeding of drug review is not working? What are the net benefits of recent legislation to speed drug development?


Note: This syllabus is long (about 19 pages), the main reason for which is that many supplementary (optional) readings are included.


Possible Readings for Discussion of 1996 Telecommunications Act
Paragons of Virtue? Strategic Entry Deterrence by Incumbent Bells



All lectures will be given in Sever 106, and will be based in PDF. Before class I will make the class slides available to students on the Internet (in PDF or in HTML format). You should not use these notes as a substitute for attending lecture.

As of the 2005-2006 academic year, I am no longer uploading html copies of the lectures, and all slides will be in PDF.




Lecture 1 [2/1/2006] - Introduction to the Class

Lecture 2 [2/6/2006] - The Classical Theory of Regulation

Lecture 3 [2/8/2006] - Capture, Re nt-Seeking and Informational Theories

Lecture 4 [2/13/2006] - Capture II
Lecture 5 [2/15/2006] - Alternatives to the Capture-Public Interest Dichotomy (Reputation and Protection without Capture)
Lecture 6 [2/22/2006] - Alternatives to the Capture-Public Interest Dichotomy (Avoiding Regulation)
Lecture 7 [2/27/2006] - Energy Regulation: Historical and Contemporary

Lecture 8 [3/1/2006] - Regulating "Natural" Monopoly I -- ROR and the Averch-Johnson Critique

Lecture 9 [3/6/2006] - Regulating "Natural" Monopoly II -- Baron-Besanko and Baron-Myerson

Filler Space for the Moment

Lecture 7 [2/22/2006] - Entry Barriers, Pricing Patterns, and the California Crisis

Lecture 8 [2/27/2006] - Rationales for Environmental Regulation

Lecture 9 [3/1/2006] - Effects of Environmental Regulation

Lecture 10 [3/6/2006] - Politics and Environmental Policy and Enforcement

Lecture 11 [3/8/2006] - Policy Alternatives (Emissions Rights Trading)

Lecture 12 [3/13/2006] - Federalism and Environmentl Regulation

Lecture 13 [3/15/2006] - The CAFE Standards

Lecture 14 [3/20/2006] - The Emergence of Transportation Regulation

Lecture 15 [3/22/2006] - Federal Aviation Regulation

Lecture 16 [4/3/2006] - Monopolies, Networks, and Rationales for Regulation

Lecture 17 [4/5/2006] - How has Telecomm Regulation Operated?

Lecture 18 [4/10/2006] - Political Influences Over FCC Regulation

Lecture 19 [4/12/2006] - Has Telecomm Deregulation Worked?

Lecture 20 [4/17/2006] - OSHA Regulation: Has It Worked?

Lecture 21 [4/19/2006] - Political Influences over Labor Regulation

Lecture 22 [4/24/2006] - Drug Regulation, Pricing, and the Reg Lag

Lecture 23 [4/26/2006] - Dynamics of Drug Development and Approval

Lecture 24 [5/1/2006] - The Effects of Pharmaceutical Regulation

Lecture 25 [5/3/2006] - Effects of Pharmaceutical Regulation