What Economic Theory Can (and Cannot) Say About Local Regulation

This chapter reviews some classical theoretical models of regulation in the presence of asymmetric information and investigates how their main insights and policy implications get modified when one sets the analysis at the local, rather than at the national, level. We focus in particular on the regulatory capture phenomenon. We show that, from a qualitative point of view, standard results remain valid. However, some specific features of the local dimension may affect the strength of agents’ incentives and thus modify the likelihood of regulatory capture and the overall efficiency of regulatory outcomes. The level of social capital and the relevant social norms appear to be the main determinants of the quality of regulation at the local level.