Regulatory Capture and Judicial Incentives

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.)


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