Regulation and the Theory of Legislative Choice: The Interstate Commerce Act of 1887

Abstract

This article concerns the economic incidence of the Interstate Commerce Act of 1887 (ICA). Our focus is the short-haul pricing constraint, a provision of the ICA that prohibited railroads from charging higher rates to isolated, primarily agrarian shippers than it charged to intercity shippers of similar commodities. Utilizing the event study methodology, we find that the impending passage of the ICA generated a distribution of abnormal returns to railroads and shipping firms that is consistent with the theoretical implications of our analysis of the short- haul pricing constraint (SHPC). However, early interpretations of the SHPC by the Interstate Commerce Commission reduced some of the abnormal returns to railroads in a manner that is inconsistent with the hypothesis that the short-haul pricing constraint was an important mechanism of early railroad regulation. The analysis does support a multiple-interest interpretation of the Interstate Commerce Act and has implications for the positive theory of regulation.