A New Institutional Economics Approach to Government Regulation

Abstract: This paper presents a New Institutional Economics (the NIE) approach to government regulation. We analyze and model the institutional determinants of the regulatory policy-making processes by looking at regulation as the outcome of complex intertemporal exchanges among the political institutions of regulation. According to our model, regulation is implemented as the outcome of a strategic game among legal and political institutions. The interaction among the political institutions of regulation reveals transaction costs of regulation and regulatory commitment. We introduce a basic sequential model and a graphical analysis, which show the trade-off between transaction costs and regulatory commitment in the regulatory policy-making processes. It also explains what happens in terms of transaction costs and regulatory commitment if the supply for regulation by the institutions of regulation responds to the demand for regulation by interest groups.