Towards a Political Economy of Industrial Organization: Empirical Regularities from Deregulation

This paper argues that the study of policy incidence in industrial organization needs to take the endogeneity of government into account. The point is made by investigating whether political considerations are important in terms of understanding the causes and effects of deregulation using data provided by the OECD. In particular, we address two interrelated questions: (i) do political and institutional factors matter in a systematic way in terms of the decision to deregulate, and (ii) if so, what does this imply in terms of the policy incidence of deregulation. Our results indicate that political considerations do matter. Most importantly, by introducing political and institutional variables into the empirical analysis of policy incidence, we find that policy conclusions are substantially different from an analysis that treats political factors exogenously. We conclude that the evidence is suggestive of the claim that a full understanding of the effect of government intervention in the marketplace implies a closer integration of political economy with industrial organization. Prepared for the Session " European Deregulation " at the European Economic Association annual conference, August 30 th – September 1 st 2001 in Lausanne. 1 " After years of reading and writing about optimal policies, one cannot help but wonder why observed trade policies are so different from the prescription of the normative literature. Of course that literature assumes the existence of a " benevolent dictator " – a species that is all to rare in the real world of economic policy making ". Grossman and Helpman 2001.