The purpose of this paper is to apply both neoclassical economics and a more recently developed method of economic analysis - new institutional economics - to Germany's system of shop closing hours regulation, and to put this peculiar type of regulation into the general theory of regulation that emerges from each of these two methodological approaches. Our intention is not only to compare the costs and benefits of the regulation itself, but also, through analyzing this particular type of regulation using both methodological approaches, to show differences between them. The paper is organized as follows: First, we look into the history of closing hours regulation from a public choice perspective. Then we apply standard neoclassical economics with a welfare economics orientation. The last part of the paper brings into play an institutional economics analysis. Our argument will focus on the difference between a simple welfare analysis where all consumers are taken as one group that might profit from cost reductions traced back to confining shopping hours to periods where labor costs are (relatively) low. In a competitive environment shopkeepers who are able to reduce costs by concentrating on fewer shopping hours should be forced to reduce prices respectively and thus would not profit from those cost reductions. Consumers who have to accept the disadvantage of confined shopping hours would be compensated by price reductions. The economic question then would be whether or not public regulation is superior to private agreements which could lead to comparable results. Our discussion looks into the preferences of different subsets of consumers. Some consumers might accept higher prices if they can shop at personally convenient hours; others might prefer lower prices and be willing to do their shopping only in limited periods of time. There is evidence of this even today, as we see many circumventions of closing hours regulation in Germany. Consumers reveal their preferences for late shopping hours by their willingness to pay higher prices when shopping in gas stations, late evening shops and Kiosks. If different groups of consumers have different preferences as far as shopping hours are concerned, the utilitarian approach of neoclassical economics would probably apply the Kaldor-Hicks test and find that closing hours regulation is economically justifiable if the winners of closing hours regulation can compensate the losers and still retain some welfare gains. This approach is difficult in practice, however, insofar as it presupposes comparability of individual utility across groups with very different preferences. Any attempt to convert these different measures of utility into a common currency would probably render the Kaldor-Hicks analysis unworkable. In practice, analysis of regulation under the Kaldor-Hicks approach thus presupposes perfect information and rationality of the person(s) evaluating the alternative regulatory regimes, and furthermore that lawmakers will respond to the evaluators' informed recommendation by implementing regulation based on the collective welfare rather than ulterior motives (special interests, ideological predispositions, etc.) The institutional economics approach goes in another direction: instead of applying the Kaldor Hicks-test to identify a solution that theoretically maximizes collective utility, identify first the learning process most likely to lead a society to a welfare maximizing solution. How can a society most effectively overcome imperfect information, irrationality and imperfections in the political process to actually solve a particular problem? Furthermore, new institutional economics characterizes the end objective somewhat differently: rather than identify the solution that maximizes collective welfare (an evaluation that, as explained above, is in practice often difficult), identify the solution that affected persons (consumers, shop owners and shop workers) would most likely consent to if they were not aware of their own special interests ahead of time (an analysis similar to the Rawlsian hypothetical consent behind a veil of ignorance.). This determination of course has difficulties of its own, but the focus of new institutional economics first on the learning process and then on actual results allows at least some characteristics of the ideal regulatory regime to be identified even if others are left to be solved by experience rather than economic theory. This article concludes that for consumers, shop owners and workers alike, in a world of incomplete information, bounded rationality, and an imperfect political process, the arguments for an evolutionary process informed by market competition are superior to the arguments for public regulation. Although cartel regulations should perhaps be relaxed to allow private agreements on opening hours between merchants in individual neighborhoods, government should not compel merchants to enter into such agreements or penalize merchants who set opening hours on their own. Furthermore, if public entities must regulate shop closing hours, it is preferable that the regulation be determined on the local level rather than by a central government. Although market competition will most likely lead to superior results, jurisdictional competition is superior to regulation dictated by a central government.
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Sep 1, 2002
Mark V Pauly 
Open Access