Modeling Regulatory Behavior: The Economic Theory of Regulation versus Alternative Theories and Simple Rules of Thumb.

Empirical tests of the economic theory of regulation have typically consisted of estimation of a model of some observed regulatory decision, with various interest group variables incorporated as exogenous determinants of that decision. Statistical significance of the coefficients of these interest group variables is then taken as empirical support for this theory. Here, a different approach is adopted. We specify seven alternative models based upon: (1) the economic theory of regulation, (2) alternative theories of regulatory behavior, and (3) simple rules of thumb. Model selection tests are then performed. Our findings reveal that the economic theory of regulation consistently outperforms the alternative method. Copyright 1993 by Kluwer Academic Publishers