Shadow interest groups and safety regulation

Abstract

In his important survey article dealing with alternative theories of regulation, Posner (1974), following Stigler (1971), identified many weaknesses in the economic theory of regulation as it existed at that time. Since then many advances in both theory (e.g., Peltzman 1976, Becker 1983) and in evidence (e.g., Kau and Rubin 1982; Kau, Keenan, and Rubin, 1983; Kalt and Zuppan 1984; McCormick and Tollison 1981) have deepened our understanding of the theory and have added support for it. One problem that Posner addressed, however, still remains. The theory still cannot explain many “consumerist” regulations, including in particular the extensive regulation of safety and health that has occurred over the last twenty years. In this article, we provide a theoretical explanation for these safety regulations. This explanation is completely consistent with the interest group theories cited above. In fact, our theory rests on a symmetry between normal interest groups and what we call “shadow interest groups.” Our starting point is the observation that at any given time there are numerous potential interest groups (or, in Olson’s terms, “latent” groups) that could conceivably form. This is because an interest group could form based on any one or more of a large number of common characteristics, where the commonality may be either in production or in consumption. Which interest groups will actually form is then a function of costs and benefits of organization. As costs of organizing a particular group change, or as benefits change, which groups actually form will also change. Our argument here is that the driving force behind the recent increase in safety regulation is the increased possibility of organizing victims of accidents. This organization of victims is discussed in detail below. It is worth noting, however, that victim groups most commonly use the litigation system, rather than the lobbying system, to obtain benefits. That is, benefits are generally obtained through litigation, not through legislation. It appears that the driving force behind this increase in victim compensation is from the cost side; the major force seems to be a reduced cost of identifying and organizing victim groups, through means such as class action suits. We do not provide a full theory of this increased