The visible hand in economics

Why we shouldn’t rely on the regulators

Posted on: September 3, 2008

I sometimes get asked why economists spend so much time thinking about incentives in situations which the government regulates anyway. Why do we care about what firms want to do when there’s only one course of action legally available to them? Here’s one reason why we care: the economy might operate in a far more laissez-faire fashion than a reading of the law would lead us to believe.

For example, via Matt Yglesias:

On June 30 the National Labor Relations Board ruled that Wal-Mart illegally fired an employee in Kingman, Ariz., who supported the UFCW and illegally threatened to freeze merit-pay increases if employees voted for union representation. The decision came eight years after the organizing campaign failed, and four years after the case was originally heard.

The law may offer workers protection but many will not be aware of it. Those that are aware of it may not be able to afford to take advantage of it through the courts. Those that can afford it may not get satisfaction until it’s already too late. None of this is news to anyone, but it is one reason why studying the incentives of a seemingly constrained agent may help us to better understand the way people act.

3 Responses to "Why we shouldn’t rely on the regulators"

[…] The visible hand in economics placed an observative post today on Why we shouldn’t rely on the regulatorsHere’s a quick excerpt […]

“None of this is news to anyone, but it is one reason why studying the incentives of a seemingly constrained agent may help us to better understand the way people act”

So fundamentally – even if agents are being told to do one thing, they still have a choice, and there is still value in studying that choice. Is that the kicker?

Its just a matter of making the correct incentives as part of the law/regulation so that when the company evaluates the alternative choices, they have the incentive to act as society prefers.

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