The Economic Incidence of the Interstate Commerce Act of 1887: A Theoretical and Empirical Analysis of the Short-haul Pricing Constraint

Abstract

The public and private interest hypotheses permeate contemporary regulatory analyses. Both theories are used to explain the inception of the first major federal regulatory agency, the Interstate Commerce Commission (ICC). According to the public and private interest hypotheses, the regulations promulgated by the ICC benefited either railroads or shippers. This paper presents an alternative view consistent with the multiple interest theory of regulation. It is demonstrated that the major regulatory instrument of the ICC, the short-haul pricing constraint (SHPC), altered the equilibria of railroad markets in a way which benefitted the class of shippers (short-haul shippers) facing monopolistic railroad markets. The SHPC also benefitted some railroads by increasing the correspondence between unregulated, cooperative and regulated, noncooperative levels of long-haul shipments. The proposition that the ICC benefited short-haul shippers and railroads is supported by an empirical analysis of the effects of the inception of federal regulation and implementation of the SHPC on stock prices. The results of the paper indicate that the public and private interest interpretations of the ICC are neither contradictory nor complete, but instead are complementary. A theoretical and empirical analysis of the chief regulatory mechanism of the ICC provides this synthesis.

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