Politicians, Interest Groups, and Regulators: A Multiple-Principals Agency Theory of Regulation, or "Let Them Be Bribed"

A bank is the prototypical financial institution; there are notable outward differences between the wealth invested by owners of financial institutions and that of other industries. The capital of a financial institution consists largely of financial assets and only to a small degree of the physical plant and equipment usually associated with capital in other industries. Moreover, these physical differences are associated with important functional differences. A financial institution, like any other firm, faces the problem of combining the inputs which it purchases to produce the outputs which it sells. In banking, the most important inputs are labor and deposits, and they produce liquidity services, brokerage services, accounting and information services, and the like. In this production process, bank capital has two roles: (1) It cooperates directly with the other inputs in the production of bank services, and (2) it is used to attract the deposit input by providing insurance to depositors against a decline in the value of a bank's assets; the more capital a bank has, the more the value of its assets can fall before depositors incur losses. The difference between banking (and financial institutions in general) and most other industries is in the relative importance of these two roles. The equity capital of any firm serves, in part, to guarantee the value of the firm's fixed obligations, but that function is usually subordinate to the provision of assets to the firm. However, in banking, equity capital (and equity is the form that almost all nondeposit ownership interest in bank assets has taken) typically accounts for only about a tenth of total bank resources, and most of the returns to equity capital derive from its insurance function. Bank owners invest capital primarily to attract deposits, which are then used to buy assets, and only secondarily to buy assets directly. Apart from these novel economic aspects, a study of investment in banking provides the opportunity to study the effects of government

What Can Regulators Regulate? The Case of Electricity

EVER since A. C. Pigou wrote his books on "welfare,"' a divergence between private and social costs has provided the main argument for instituting government action to correct allegedly inefficient market activities. The analysis in such cases has been designed less to aid our understanding of how the economic system operates than to find flaws in it to justify policy recommendations. Both to illustrate the argument and to demonstrate the nature of the actual situation, the quest has been for real-world examples of such defects.

The Independent Judiciary in an Interest-Group Perspective

ECONOMISTS increasingly have come to view the regulatory process as a device for transferring wealth among factions in society according to their political clout, but so far it is unclear whether the process has been dominated by the interests of regulated producers, consumers, or some combination of the two.' Relatively little attention has been given in this literature to the rewards that regulators themselves may obtain from the process. One obvious possibility would be for ex-officials to take jobs with firms that were formerly under their jurisdiction. This incentive would be especially strong for regulatory commissioners. Commissioners receive direct salaries that are not large, serve terms of office that are fixed by statute, and face uncertain prospects of reappointment-all of which lead them to take a shorter run view of their situation compared to that of their bureaucratic counterparts in civil service.2 A commission might be viewed as "captured" by regulated firms or related organizations if a large proportion of its membership either has experienced precommission employment or has accepted postcommission employment with such groups. The purpose of this paper is to discover how common this behavior has been.

The Private Enforcement of Law

This article examines the brand-name effect of airline crashes. These disasters raise several financial issues. A crash represents the loss of a plane, the loss of lives, the loss of scheduling capacity, higher insurance costs, and the potential loss of consumer goodwill. This article focuses on the last of these. Are consumers reluctant to fly with airlines that have poor safety records or do they treat crashes merely as random events that bear no reflection on the quality of the airline?

EUGENE FAMA and Michael Jensen's treatment of the "Separation of Ownership and Control" is both insightful and informative. It deepens our understanding of corporate control, and the analysis of residual claimants usefully extends the economics of internal organization to include partnerships, mutuals, nonprofits, and the like. The basic argument is this: specialized governance structures arise in response to the efficiency needs of each type of organization. This is an important argument and one with which I broadly concur. They couple this, however, with a strong suggestion that these structures have reached a high degree of refinement-on which account there is not now, if indeed there ever has been, an organization control problem with which scholars and others are legitimately concerned. On this point I have grave doubts. My discussion of the paper addresses three issues: What is the relation, if any, of the hierarchical organization of the firm to economic performance? What relation, if any, does residual claimant status have to the composition and character of the board of directors? And is there now or has there ever been a corporate control problem? I deal with each of these issues in order.

A Theory of Oligopoly

ECONOMISTs have often argued that if an industry acts as a monopolist it would be desirable government policy either to break up the monopoly or, if this is undesirable because of increasing returns, to regulate and perhaps even nationalize it.' This proposition, although extremely well known and often accepted as obvious, turns out upon close examination to be far from obvious, and to involve several assumptions of doubtful validity. The argument supporting this proposition goes something as follows: Monopolies cause a maldistribution of resources, since the price charged by a monopolist exceeds marginal costs and an optimal distribution requires price equal to marginal cost. An optimal allocation would occur if the industry were made competitive, since price equals marginal costs in competitive industries. If the industry were a "natural" monopoly, price could be made equal to marginal cost either indirectly by government regulation or directly by government administration. Therefore, the recommendation is an anti-trust law to prevent or break up contrived monopolies and government regulation or government administration of natural monopolies. The non-sequitor in this argument is the sentence beginning with "therefore"; the recommendation of government intervention does not follow from the demonstration that government intervention could improve matters. Demonstrating that a set of government decisions would improve matters is not the same as demonstrating that actual government decisions would do so. This kind of inference is logically equivalent to identifying the actual workings of the market sector with its ideal workings. In Section I a theory of the workings of a political democracy under ideal conditions is developed. It is shown that an ideal democracy is very similar

Social and economic activities, like religion, entertainment, education, research, and the production of other goods and services, are carried on by different types of organizations, for example, corporations, proprietorships, partnerships, mutuals and nonprofits. There is competition among organizational forms for survival. The form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs. The characteristics of residual claims are important both in distinguishing organizations from one another and in explaining the survival of organizational forms in specific activities. This paper develops a set of propositions that explaim the special features of the residual claims of different organizational forms as efficient approaches to controlling agency problems. © M. C. Jensen and E. F. Fama, 1983 Michael C. Jensen, Foundations of Organizational Strategy Chapter 6, Harvard University Press, 1998. Journal of Law & Economics, Vol XXVI (June 1983) This document is available on the Social Science Research Network (SSRN) Electronic Library at: http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=94032 AGENCY PROBLEMS AND RESIDUAL CLAIMS

Iceland is known to men as a land of volcanoes, geysers and glaciers. But it ought to be no less interesting to the student of history as the birthplace of a brilliant literature in poetry and prose, and as the home of a people who have maintained for many centuries a high level of intellectual cultivation. It is an almost unique instance of a community whose culture and creative power flourished independently of any favouring material conditions, and indeed under conditions in the highest degree unfavourable. Nor ought it to be less interesting to the student of politics and laws as having produced a Constitution unlike any other whereof records remain, and a body of law so elaborate and complex, that it is hard to believe that it existed among men whose chief occupation was to kill one another.

The method for measuring the effects of environmental regulation on the size distribution of industrial plants and the distribution of factor shares described in this paper focuses on the 20 industries with highest per unit pollution abatement costs and the 20 with the lowest costs. The study finds that compliance with environmental laws has not only reduced the number of plants in the affected industries, but has placed a greater burden on small rather than on large plants. Besides redistributing within-industry market shares, environmental regulation has increased the use of capital relative to labor. Although the disproportionate burden placed on small plants in the high abatement cost industries may have been unintended, it is likely that large firms will be less vocal opponents of environmental regulation than are small firms. 22 references, 12 tables.

T HIS study empirically examines the effects of increases in the level and enforcement of insider-trading regulations in the 1980s on corporate insiders.1 The main goal of the insider-trading regulations is to prevent insiders from trading on the basis of material, nonpublic corporate information. In addition, regulations require that insiders report their transactions to the Securities and Exchange Commission (SEC) and refrain from generating short-term profits by trading in their own firms' stocks. Regulations also prohibit insiders from short selling the securities of their firms.

W HEN investors purchase shares of common stock, they typically acquire the right to vote in the election of the firm's board of directors and on other major issues facing the corporation. In most corporations board members are elected through "straight voting." In straight voting each shareholder is entitled to cast votes equal to the number of shares held for each director position. If a group controls 51 percent of the vote, it can elect the entire board of directors by casting all of its votes for the candidate that it favors for each position. Some firms do not use straight voting but elect their board members through "cumulative voting" instead. In cumulative voting each share entitles the shareholder to as many votes as there are directors to be elected. A shareholder may cast all votes for a single candidate or distribute them among more than one nominee. With cumulative voting it may be possible for minority shareholders to elect some board members even if the majority of shareholders oppose their election. To elect these directors, the minority shareholders would cumu-