Academic journal article Independent Review

The Rise of the Regulatory State: Institutional Entrepreneurship and the Decline of Markets for Blood

Academic journal article Independent Review

The Rise of the Regulatory State: Institutional Entrepreneurship and the Decline of Markets for Blood

Article excerpt

Regulation is ubiquitous in wealthy nations around the world today. No aspect of life in a modern Western economy remains unregulated, and although regulation of product safety, for example, often goes unnoticed, it is not costless (Thomas 2012; Chambers and Collins 2016; Coffey, McLaughlin, and Peretto 2016; McLaughlin and Stanley 2016). Research on the economic cost of red tape abounds, and yet the flood of new rules that enter the federal code of regulation each year seems unstoppable.

Edward Glaeser and Andrei Shleifer (2003) argue that this rise of the regulatory state is an efficient response to the court system's failure to resolve property-rights disputes effectively (see also Shleifer 2010). In their model, courts and regulation are alternative institutional structures designed to achieve the social control of business. When businesses seek to avoid legal damages, courts can be the most efficient institutional mechanism for the facilitation of exchange. However, as businesses grow larger, they influence the courts more frequently in their favor, property rights become less secure, and regulation becomes relatively more efficient as a means of social control of business.

We argue here that Glaeser and Shleifer (2003) are too optimistic about the potential for regulation to alleviate court-system failure. Our discussion suggests instead that institutional entrepreneurs often use regulation to undermine the court system when it successfully constrains business to socially useful activities. We suggest that the economic theory of regulation paired with a theory of institutional entrepreneurship is the more plausible explanation for the rise of the regulatory state. Lobbyists actively seek out regulation and provide the impetus for intervention in order to undermine the legal institutions that constrain the industries they represent.

Blood markets in the United States are a case in point. Prior to state and federal regulation of markets for blood in the 1970s, blood supply in the United States was sourced from both volunteer and nonvolunteer or paid donors. Since 1978, nonvolunteer or commercial blood has essentially been banned. This ban was initially justified as an effort to combat hepatitis transmission. As we show, however, regulation of blood markets, despite its otherwise noble aim, effectively undermined a more efficient legal regime governing blood markets at the time and was ultimately merely the result of successful lobbying by a coalition of blood donor agencies and hospitals that benefited from the intervention.

The first section of this paper discusses Glaeser and Shleifer's (2003) explanation for the rise of the regulatory state in the context of the existing literature on regulation versus litigation. Then in the second section we summarize the history of the legal institutions governing markets for blood before intervention. In the third section, we recount the rise of regulatory institutions governing markets for blood. We close by describing problems in the market for blood today and drawing conclusions from our inquiry.

Theories of Regulation versus Litigation

The earliest justification for regulatory intervention (Pigou 1920) famously suggests that government intervention is needed to address negative-spillover effects of market activities. This public-interest theory of regulation was first questioned by Ronald Coase in his article "The Problem of Social Cost" (1960). Coase famously argued that litigation will solve problems of negative externalities as long as property rights are well defined and transactions costs low. Following Coase, much of the literature in law and economics has discussed the trade-off between regulation and litigation in terms of transaction costs and more specifically in terms of potential information and incentive problems with either method of social control of business. Richard Posner argues, for example, that the choice between the two methods of public control, regulation or litigation, should "depend upon a weighing of their strengths and weaknesses in particular contexts" (1977,271). …

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