Sam Peltzman

Edward S. Herman writes:

Stigler himself and many of his followers continued their modelling of regulation and its effects by the same or related methods. The most important Stigler follower in this area was Sam Peltzman, who wrote a Ph.D. thesis under Stigler's direction in 1965 that purported to show that the extension of federal regulation to virtually all banks in 1935 caused the entry of new banks to drop by 40-50 percent. Peltzman's method was to specify several factors that might influence entry rates, most importantly bank profit rates, and then explain any decline in entry after 1935 not attributable to the chosen factors by a "residual" called "government regulation." Although branch banking was growing rapidly in this period, Peltzman never included new branches in his model. Among the many other intellectual crimes committed by Peltzman, the model had the interesting characteristic that the poorer the explanatory variables, the better the result from the Chicago School standpoint (i.e., the larger the residual "government regulation").

This terrible study was cited as authoritative in the years that followed, and was never rebutted, in part because the formulation and testing of a rival model required data collection back into the 1920s and would have been very arduous. Peltzman followed up this success with studies of drug and auto safety regulation, each demonstrating by means of the new Chicago School methodology-us¬ing dubious explanatory variables, and leaving government regulation as the residual-that government regulation was ineffective. Several analysts went to the trouble of showing that Peltzman's further studies were fraudulent, but his studies continued to be cited as authoritative demonstrations that the case for drug and auto safety regulation was dubious.

See Also

• The Chicago School
• George Stigler by Edward S. Herman
• Milton Friedman by Edward S. Herman