On the Incentives of Regulators: The Case of Taxicabs

It is customary for research in the regulated industries to focus on two important and related problems. The first is to describe the extant regulatory policy for some industry, the circumstances that brought it forth, and the events that caused it to change over time. The second problem is to analyze the manner in which regulation has affected the allocation of resources in the industry. The purpose of this study is to identify and examine a third problem: the nature of the system of costs and rewards facing regulators and its effect on their choices among alternative regulatory policies and market structures. Of special interest is why regulators may have incentives to choose to regulate a monopoly, or to establish monopolistic or cartel-like arrangements, in industries that lack the technological and demand characteristics usually associated with "natural monopoly." This paper uses the theory of utility maximization to explain differences in the structures of costs and rewards facing decisionmakers in different types of regulatory institutions. It suggests that the decision to establish monopolized markets should be found more often in one particular type of regulatory situation and tests several hypotheses with data collected from taxicab markets in more than thirty cities in the United States.