The Evolution of the Regulatory Contract

George Priest drew an analogy between public utility regulation and relational contracts, combining legal, economic, and historical analysis to explain an evolution from municipal franchise agreements to public utility commissions. The contract analogy has the benefit of drawing attention to both the supply and demand sides of regulation. I argue that this perspective can shed light on an episode that the economic theory of regulation has otherwise struggled to explain—the dramatic changes in the regulatory landscape beginning in the late 1970s, commonly known as deregulation. Changes to the organization of Congress had unanticipated consequences for its ability to supply the type of cartel-enforcing regulations then common in many large industries. The result was the end of cartel enforcement and an expansion of conduct of business rules. Simultaneously, post-government employment became a more important form of payment for favorable regulatory treatment.