Unintended Consequences of Regulation


Well-Meaning Regulation of One Industry Can Cause Unintended Negative Impact on Neighboring Industry

The road to perdition, the adage goes, is paved with good intentions. Similarly, many observers say the road to poor economic performance may be paved with well-meaning regulations. 

Count economist Ricard Gil of Johns Hopkins University among those offering that observation. In a new study for Economic Inquiry, Gil and co-author Fernanda Gutierrez-Navratil show that the deregulation of the once-constrained television industry in Spain set off a boom in TV viewing. This in turn led to a substantial decline in attendance and box office revenues at Spanish movie houses.

“When governments take regulatory actions, they focus on the particular industry they’re trying to help. But often neighboring industries are affected in unintended negative ways. That’s a tradeoff that is rarely considered in advance by regulators,” says Gil, an associate professor at the Johns Hopkins Carey Business School.

The deregulation of Spanish television began with a 1995 national law that allowed each town to have up to two local stations. In 2002, with a more conservative government in Madrid, deregulation was expanded so larger towns could have a station for every 250,000 inhabitants. The number of local stations throughout the country multiplied, many of them running TV programs about local culture, politics, and sports that attracted viewers who might otherwise have gone out to the movies.

Between 1995 and 2002, movie attendance in Spain increased by 55 percent, thanks to a rise in the number of suburban multiplex cinemas. However, in the eight years following the 2002 deregulation, movie attendance fell by 30 percent. A clear correlation exists, the paper affirms, between the increase in small-screen viewing and the decrease in big-screen viewing among Spaniards during this period.

Gil, who earned his doctorate in economics from the University of Chicago, says he views this study as a sort of cautionary tale for regulators at all levels of government, across all industries and policy areas. The paper warns starkly against “naïve implementation of regulation and policy that does not examine potential impact on neighboring industries.”

From beyond the media world, Gil cites the example of subsidies designed to protect the price of soybean crops in Argentina. The upshot was that many meat producers became soybean farmers to cash in on the new policy. The supply of meat went down, the price went up, and fewer Argentines could afford one of their favorite foods.

“Is that to say regulating the soybean industry in Argentina was a mistake? Not necessarily,” Gil explains. “It’s probably a good thing when you consider how many people are dependent on the soybean market. But the government clearly didn’t understand what the consequences of their policy would be. They didn’t give enough thought to the possibility that if you pay some people to do A, then other people will stop doing B to produce A and get paid as well.”

Last April, the two co-authors presented their paper at a seminar for policy makers at the Federal Communications Commission in Washington, D.C. The findings found an appreciative audience there, says Gil: “These were people who write many of the policies and regulations of the FCC, and they told us they’re often pressured to work quickly in making recommendations. They’d like to take more time with their assessments, and the paper helped put across their point that these issues are never as simple as they look. More time is needed to consider a regulation’s potential repercussions.”               

He adds, “We’re not saying it’s easy to anticipate every possible impact. But regulators need to start thinking more about ‘If we take this step, what’s going to happen as a result?’”

Further research could dig even more deeply into how regulations for one industry can affect another, Gil suggests. For instance, would the TV-related declines in movie attendance and box office receipts hinder the ability of studios to produce high-quality, engaging films?

The study “Does Television Entry Decrease the Number of Movie Theaters?” received financial support from the Spanish Ministry of Economy and Competitiveness and the Basque Country Government. Gutierrez-Navratil served as a post-doctoral researcher in economics at the Carey Business School while working with Gil on the project. Besides having appeared online last month, the paper is forthcoming in the print edition of Economic Inquiry.

Posted on December 7, 2016 In Faculty Story, News Item, Press Release, Research Story