This chapter uses the approach described in Chapter 2 to explain the administrative choices the enacting legislature makes in the regulatory arena. Regulatory activity has a number of distinctive characteristics that help shape the mix of transaction problems legislators face and the potential institutional solutions available. In particular, the very nature of regulation often allows for direct participation of affected private interests in administrative decision making. The private benefits of this participation are often higher – and the informational costs of effective participation lower – than they are for other forms of public administration. Moreover, there is often a close professional link between public regulatory administrators and private lawyers; indeed, they can work on opposite sides of the same case. This makes it easier for outsiders to judge the performance of individual regulators, which means that the external labor market can exert a strong influence.

Most of this chapter is devoted to the way in which these two influences are used to control various types of agency problem. This does not deny the importance of the different aspects of ongoing legislative intervention that have received so much attention in the literature: legislative oversight, the budgetary process, appointments, and legislative direction. Rather, it helps clarify the role that these various interventions play.

The discussion in this chapter is confined to regulatory agencies in the United States.