Regulatory Fog: The Informational Origins of Regulatory Persistence

Abstract

Compared with other types of policy, regulation is very persistent, even when inefficient. We propose an explanation for regulatory persistence based on regulatory fog, the phenomenon by which regulation obscures information about the effects of deregulation. We construct a dynamic model of regulation in which the underlying need for regulation varies stochastically, and regulation undermines the regulator's ability to observe the state of the world. Compared to the full-information benchmark, regulation is highly persistent, often lasting indefinitely. The regulatory fog effect is robust to a broad range of partially informative policies and can be quite detrimental to social welfare.