Regulatory Capture and Judicial Incentives

by on November 4, 2010 at 10:16 am in Books, Economics, History, Law | Permalink

John Kay recounts the classic story of regulatory capture:

In 1887, Congress passed an act to regulate the US railroad industry. The legislation originated in the demands of farmers and merchants for protection against the “robber barons”.

Despite this background, railroad interests supported the bill. Charles Adams, president of the Union Pacific Railroad, explained his reasoning to a sympathetic congressman, John D. Long. “What is desired,” he wrote, “is something having a good sound, but quite harmless, which will impress the popular mind with the idea that a great deal is being done, when, in reality, very little is intended to be done.”

On the whole, he got what he wanted. The Interstate Commerce Commission established by the act was chaired by a lawyer with experience of the railroad industry – acquired, naturally, by acting on behalf of his railroad clients. When, a decade later, the Supreme Court ruled that a rate-fixing agreement between railroads was illegal, the ICC was crestfallen: surely, the commission said, it should not be unlawful to confer, to achieve what the law enjoins – the setting of just and reasonable rates. Soon after, Congress approved legislation making it a criminal offence to offer rebates on tariffs the ICC had approved, and the commission thereafter operated as the manager of a railroad cartel.

Kay is a little too quick, however, to argue in favor of judges.  Aside from the tradeoff (which Kay notes) that Judges will be less informed than people closer to the industry (the bias-efficiency tradeoff familiar from econometrics), judges also have their own set of interests and incentives.  Elected judges, for example, tend to be biased towards plaintiffs (voters) and against out-of-state corporate defendants (non-voters).  More generally, I think Kay understands politics without romance but still sees law with a romantic lens.

The application of public choice insights to legal institutions, "law without romance," is a new and growing field. If you are interested, I recommend The Pursuit of Justice, a very good new book on this topic (edited by Ed Lopez, I was general editor.)

canlı s November 4, 2010 at 6:30 am

Soon after, Congress approved legislation making it a criminal offence to offer rebates on tariffs the ICC had approved, and the commission thereafter operated as the manager of a railroad cartel.

J Thomas November 4, 2010 at 7:17 am

To what should we attribute the pace of innovation in railroad technology?

Steve C. November 4, 2010 at 7:48 am

"To what should we attribute the pace of innovation in railroad technology?"

Better management. Late 19th century railroad companies pioneered most of the techniques that came to be known as the "science of management". The innovation was the software. Most industrial companies at the turn of the century adopted and adapted railroad management principles as a means to organize their resources over time and space.

J Thomas November 4, 2010 at 9:47 am

"To what should we attribute the pace of innovation in railroad technology?"

Better management. Late 19th century railroad companies pioneered most of the techniques that came to be known as the "science of management".

Good! And it was late 19th century that the ICC became the cartel manager.

What about later? The innovation over the last 50 years?

J Thomas November 4, 2010 at 10:53 am

Thank you again, Steve C.! Great answer.

My old math teacher had a student who went to work on railroad IT around 40 years ago, before my time. But then he got into an auto accident and died. The other driver in the accident was a black union organizer who got a maximum penalty. My teacher used to speculate that this one person might have made 20 years difference for the railroads, if he had lived. But now the teacher is dead too.

teemingmultitudes November 4, 2010 at 11:28 am

I am worried about "Law without Romance" because the approach will be familar. Models of self-interested agents and predictions that people will decide in accordance with their own interests. These predictions tend to be self-fulfilling. We have seen that in the Financial Market, where people were told that it is natural to be greedy, and so they proved to be.
That is what the mystique of law, medicine, architecture, etc is for. There is no doubt that their practitioners, too, respond to incentives. But those incentives aren't only financial. That is what John Kay points out in many, many articles. By creating a cult of professionalism, by creating an expectation that people will act professionally, and by using shame and ostracism as weapons for punishing unethical behavior, you create expectations which will attract certain kinds of people and result in certain kinds of behavior. That is where the meta-profession of journalism comes in. You need a cult of professionalism there, a refusal to sell the news.
A model using self-interested agents will lump all pride into a "taste" for justice in the judges, and will highlight the tendency of ordinary judges to decide in line with their financial interests, while ignoring the deviations from the mean: the judges who decide according to the law as they see it. These latter are the significant ones who really shape the long-term evolution of the law.
For all the talk of "self-interest" the truly self-interested judges, bureaucrats, and ministers are not in the US. They are in the 3rd world, and that explains why they are the 3rd world.

teemingmultitudes November 4, 2010 at 11:46 am

"insignificant majority". Not "minority". Goodness!

Nick November 5, 2010 at 8:49 am

For what its worth, the railroad industry as a whole was spectacularly unprofitable on the whole during this so called cartel period.

When it was put into place, there was significant over capacity and fragmentation, which took a century to eliminate.

The regulatory structure was simply one element that slowed down the inevitable rationalization of the industry.

Thomas Esmond Knox November 7, 2010 at 8:11 pm

There are no elected judges in Australia. Probably no elected judges in the UK.

I have no idea of the effect.

Rustam November 15, 2010 at 12:11 pm

Hi,

I'm studying law and economics in Europe (erasmus mundus master in law and economics) and I am very interested in applying public choice (price theory?) to judicial decision making since we have in Europe an important amount of literature on behavioral science applied to judicial choices but a few scholars working on removing romance lens from law.
Since in civil law countries we don't have elected judges do you think that it might make sense to apply public choice theory to european (continental) judicial choices? Any suggestions are more than welcome!

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