The Behavior of Regulatory Activity over the Business Cycle: An Empirical Test

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Economic Inquiry



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This paper tests a prediction of the interest‐group theory of regulation which suggests that regulators generally will not force any one group to bear the full adjustment costs associated with variations in the business cycle. That is, the interest‐group model predicts that regulatory agencies will redistribute cyclical gains and losses by supplying more “producer protection” regulation during contractions and more “consumer protection” regulation during expansions; i.e., regulatory activity which reduces consumer welfare will tend to be countercyclical, intensifying when aggregate demand falls and abating as demand increases.

The empirical results show a countercyclical and statistically significant ceteris paribus relationship between Federal Trade Commission enforcement efforts under the Robinson‐Patman Act and several alternative measures of general business conditions. Since the Robinson‐Patman Act is viewed widely as anti‐consumer, the findings suggest that in cyclical downturns the Commission moves to protect producers against losses by bringing more cases which limit the tendency for prices to fall. This result may be rationalized under the view that during recessions, the Federal Trade Commission is in the business of transferring wealth from consumers either to protect small business or to bolster cartels. On the other hand, during business expansions the Commission reduces its Robinson‐Patman case load, and such a change in enforcement may serve to mitigate producer gains, transferring wealth to consumers at the margin. In any case the paper offers empirical support for the interest‐group model by providing evidence that the business cycle plays an important part in explaining the level and pattern of regulatory activity.