Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter October 26, 2016

What Do Regulators Value?

  • Dennis L. Weisman EMAIL logo


In a pioneering article entitled “Taxation by Regulation,” Judge Richard Posner challenged the prevailing orthodoxy that regulation emulates competition along the lines of the Public Interest Theory of regulation. He argued that regulation is best viewed as a branch of public finance in which the power of the state is leveraged to achieve non-competitive outcomes. We develop an indirect test of Posner’s theory by specifying the regulator’s welfare function as a convex combination of consumer surplus, profits shared with the regulator and profits retained by the regulated firm. The welfare weights cannot be observed directly, but can be inferred from the regulator’s behavior in equilibrium. To wit, when the regulator permits the regulated firm to earn positive profits and authorizes higher prices in response to a greater degree of profit sharing this establishes both an upper bound on the consumer surplus weight and a higher weight on shared profits than on profits retained by the regulated firm. Applying this test to the implementation of the 1996 Telecommunications Act lends support to Posner’s theory.

JEL Classification: L51; L96


I am grateful to two anonymous referees and the editor, Johann Brunner, for insightful comments and constructive suggestions for revision that improved the manuscript. I thank Soheil Nadimi for expert research assistance. The usual caveat applies.


Baumol W. J.,, Walton A. G. 1973. “Full Costing, Competition and Regulatory Practice.” Yale Law Journal 82 (4):639–655.10.2307/795418Search in Google Scholar

Bonbright J. C, 1961 Principles of Public Utility Rates. New York: University Press.10.7312/bonb92418Search in Google Scholar

Braeutigam R. R. Optimal Policies for Natural Monopolies. In: Schmalensee R., Willig R., editors. In Handbook of Industrial Organization Vol. 1. Amsterdam: North-Holland, 1989:1289–1346.10.1016/S1573-448X(89)02011-XSearch in Google Scholar

Brock G., 1994 Telecommunications Policy for the Information Age. Cambridge MA: Harvard University Press.Search in Google Scholar

Crandall R. W. The Role of the U.S. Local Operating Companies. In: Crandall R. W., Flamm K., editors. In Changing the Rules: Technological Change, International Competition, and Regulation in Telecommunications. Washington, DC: The Brookings Institution, 1989:114–146.Search in Google Scholar

Crandall R. W., Waverman L., 2000 Who Pays for Universal Service?. DC: Brookings.Search in Google Scholar

deButts J. D., 1973 An Unusual Obligation. Washington: National Association of Regulatory Utility Commissioners, Seattle.Search in Google Scholar

Fowler M. S., Halprin, A., Schlichting J. D. 1986. “‘Back To The Future’: A Model For Telecommunications.” Federal Communications Law Journal 38 (2):193–194.Search in Google Scholar

Goldberg V. P 1976. “Regulation and Administered Contracts.” Bell Journal of Economics 7 (2):426–448.10.2307/3003265Search in Google Scholar

Greenstein S., McMaster S., Spiller P. T. 1995. “The Effect of Incentive Regulation on Infrastructure Modernization: Local Exchange Companies’ Deployment of Digital Technology.” Journal of Economics and Management Strategy 4 (2):187–236.10.1111/j.1430-9134.1995.00187.xSearch in Google Scholar

Hazlett T. W 2006. “Rivalrous Telecommunications Networks With and Without Network Sharing.” Federal Communications Law Journal 85:477–509.10.2139/ssrn.707633Search in Google Scholar

Jarrell G. 1978. “The Demand for State Regulation of the Electric Utility Industry.” Journal of Law and Economics 21:269–295.10.1086/466921Search in Google Scholar

Kahn A. E, 1970 The Economics of Regulation: Principles and Institutions Vol. I. New York: John Wiley and Sons.Search in Google Scholar

Kahn A. E., Tardiff T. J., Weisman D. L. 1999. “The 1996 Telecommunications Act At Three Years: An Economic Evaluation of Its Implementation By The FCC.” Information Economics and Policy 11 (4):319–365.10.1016/S0167-6245(99)00025-6Search in Google Scholar

Keeler T. E, 1983 Railroads, Freight and Public Policy. Washington, DC: The Brookings Institution.Search in Google Scholar

Laffont J.-J., Jean Tirole A., 1993 Theory of Incentives in Procurement and Regulation. Cambridge, MA: The MIT Press.Search in Google Scholar

Lehman D. E., Weisman D. L. 2000. “The Political Economy of Price Cap Regulation.” Review of Industrial Organization 16:343–356.10.1023/A:1007845023817Search in Google Scholar

MacAvoy P. W., 1996 The Failure of Antitrust and Regulation to Establish Competition in Long-Distance Telephone Services. Washington, DC: The AEI Press and Cambridge MA: The MIT Press.Search in Google Scholar

McChesney F. S, 1997 Money for Nothing: Politicians, Rent Extraction, and Political Extortion. Cambridge, MA: Harvard University Press.Search in Google Scholar

Onemli B. Ph.D. ThesisKansas State University, 2010. Three Essays on Regulatory Economics.Search in Google Scholar

Peltzman S. 1976. “Toward a More General Theory of Regulation.” Journal of Law and Economics 19:211–240.10.3386/w0133Search in Google Scholar

Peltzman S. 1993. “George Stigler’s Contribution to the Economic Analysis of Regulation.” Journal of Political Economy 101:818–832.10.1086/261904Search in Google Scholar

Posner R. A. 1971. “Taxation by Regulation.” Bell Journal of Economics 2:22–50.10.2307/3003161Search in Google Scholar

Posner R. A. 1974. “Theories of Economic Regulation.” Bell Journal of Economics 5 (2):335–358.10.3386/w0041Search in Google Scholar

Posner R. A. 1975. “The Social Costs of Monopoly and Regulation.” Journal of Political Economy 83 (4):807–827.10.3386/w0055Search in Google Scholar

Priest G. L. 1993. “The Origins of Utility Regulation and the ‘Theories of Regulation’ Debate.” Journal of Law and Economics 36:289–323.10.1086/467276Search in Google Scholar

Sappington David E. M., Weisman D. L., 1996 Designing Incentive Regulation for the Telecommunications Industry. Cambridge, MA MIT Press and Washington, DC: AEI Press.Search in Google Scholar

Spiller P. T. 1990. “Politicians, Interest Groups and Regulators: A Multiple Principals Agency Theory of Regulation, (or Let Them Be Bribed).” Journal of Law and Economics XXXIII:65–101.10.1086/467200Search in Google Scholar

Stigler G. J., Friedland C. 1962. “What Can Regulators Regulate? The Case of Electricity.” Journal of Law and Economics 5:1–16.10.1086/466579Search in Google Scholar

Stigler G. 1971. “The Theory of Economic Regulation.” Bell Journal of Economics 2:3–21.10.4324/9781315495811-8Search in Google Scholar

(Telecommunications Act of 1996) (1996).Pub. LANo. 104–104, 110 Stat. 56.10.1016/S0167-5273(96)90040-6Search in Google Scholar

Temin P, 1987 The Fall of the Bell System. New York: Cambridge University Press.10.1017/CBO9780511572388Search in Google Scholar

Texas Public Utility Commission, Open Meeting. Docket Nos. 16189, 16196, 16226, 16285, 16290, 16455, 17065 1997 . Agenda Item No. 1 June 181997.Search in Google Scholar

Weiman D. F., Levin R.C. 1994. “Preying for Monopoly? The Case of Southern Bell Telephone Company, 1894–1912.” Journal of Political Economy 102 (1):103–126.10.1086/261923Search in Google Scholar

Weisman D. L 1994. “Why Less May Be More Under Price-Cap Regulation.” Journal of Regulatory Economics 6 (4):339–362.10.1007/BF01418231Search in Google Scholar

Weisman D. L., Robinson G. O. Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn. In: May R. J., editors. In New Directions in Communications Policy. Durham, NC: Carolina Academic Press, 2009:3–37.Search in Google Scholar

Weisman D. L. 2015. “Bribing Regulators.” Applied Economics Letters 22 (7):581–586.10.1080/13504851.2014.959649Search in Google Scholar

Wenders J. T., 1987 The Economics of Telecommunications: Theory and Policy. Cambridge, MA: Ballinger.Search in Google Scholar

White L., 1999 U.S. Public Policy toward Network Industries. Washington, DC: AEI-Brookings Joint Center for Regulatory Studies.10.2139/ssrn.164500Search in Google Scholar

Published Online: 2016-10-26
Published in Print: 2016-10-1

©2016 by De Gruyter

Downloaded on 1.4.2023 from
Scroll to top button