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I am interested in the size of what I call the regulatory/supervisory sector in Western economies. A regulatory/supervisory (R&S) activity involves either:

  • Determining a set of rules economic agents must comply with under penalty of retaliatory action (regulation).
  • Monitoring and enforcing the compliance of economic agents with a set of rules (supervision).

These functions can be accomplished either by public or private actors: for example, in the UK the Financial Conduct Authority is responsible for regulating and supervising the behavior of individuals working in the financial sector; on the other hand, auditing companies such as EY and PwC are hired to monitor whether companies comply with accounting standards.

Is there any paper which studies the size of the R&S sector in the economy or its impact of the economy? Is there any economist which specializes in this? These can also be old economists from XIXth or XXth Century which thought and wrote about it.

Why do I ask this? Roughly speaking, as economies (such as countries or regions) grow over time, their economic fabric becomes more complex and sophisticated as they transition to activities with higher value added. My impression is that economies will experience a continuous, long-term upward trend in the number of R&S jobs both in the public as well as in the private sector, with the portion of economic activity belonging to the R&S sector converging towards some sort of equilibrium point (I do consider the existence of R&S cycles). The need for these positions comes from different structural factors, among which:

  1. As economies become more complex and sophisticated, certain systemic risks gradually emerge and R&S jobs are needed to monitor and control these risks (e.g. the development of the banking systems in Western countries has generated the risk of systemic financial instability, as seen in the numerous banking crisis throughout the last centuries);
  2. Growth often comes through innovation, which brings disruption through the formation of new sectors of activity which tend to replace or substitute old ones. As these new sectors grow and become more mature, the limitations and risks they pose become gradually apparent to society which will ultimately demand to regulate and supervise them either through private or public action (e.g. the current debate around the use of personal data by social networks and the need to regulate it);
  3. Rogue economic actors can exploit institutional loopholes or lack of oversight to perform illegal or borderline illegal activities for their profit. Once society identifies these shortcomings, R&S is improved to avoid repetition of these unfair practices (e.g. the Enron scandal and the resulting Sarbanes-Oxley Act in the US).

On the other hand, it could be argued that the size of R&S activity is not intrinsically increasing: for example, regarding point 2 above, it can be argued that as new industries replace old ones, so too do new R&S roles replace old roles.

Given I believe the R&S sector can only grow in relative size over the long term, I am logically interested in understanding how this sector influences the economy and how an economy evolves as a consequence of the increasing importance of regulation and supervision. For example, it might be the case that an outsized R&S sector has similar negative effects to those due to the proliferation of rent-seeking activities.

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