Rents – Politics and Regulation

Rents, Politics, and Regulation

Before turning to forms of the contemporary theory of regulation, let us review what "rent seeking" means. A basic model is presented in Figure 4.
For simplicity, assume linear demand and marginal-revenue curves plus a constant average and marginal-cost function. Under competitive conditions a quantity Qc would be produced and sold at price Pc. A monopoly, or a legal­ized cartel such as that provided under a regulatory system, could have the effect of causing a reduction of output to Qm, and a rise in price to Pm. It is important to be clear about the nature of the losses. Triangle AFG corresponds to a deadweight loss due to monopoly—one that was first noticed by the French engineer Jules Dupuit. Such a loss is always present whenever price exceeds marginal cost (excise taxes and monopoly prices are analogous in this regard).

But what of area PcPmAF? Many economists have claimed these "rents" represent only a redistribution from consumers to the monopolist. In the con­text of regulatory processes, however, they may be viewed by any given com­petitor as the value of gaining the franchise.12 In other words if a single award is given, each individual competitor will have an incentive to spend an amount PcPmAF, less an infinitesimal amount, for the exclusive monopoly-granting franchise. Likewise, a cartel, assuming that shares among firms can be cheaply and efficiently devised, would be willing to bid a similar amount for protection from competition. The disposition and dissipation of these rents could be in lobbying or legal fees. With these principles in mind, let us return to the po­litical and economic interconnections in the regulatory process.

A clear imperfection exists in the above argument. Legally, of course, politicians and regulators cannot take bribes, although, as stated earlier, sub rosa and illegal side payments have on occasion been unseemly features of govern­ment at all levels. Payments from business interests may take other forms, of course, and these motives are the key to the modern theory of regulation. Reg­ulation, like any other good, such as shoes or beer, is demanded and supplied with underlying motives of self-interest. In a provocative paper published in 1971 ("The Theory of Economic Regulation") George Stigler fleshed out a "capture" theory of regulation based upon self-interested motives of demand-ers and suppliers. This view, it must be emphasized, is only superficially sim­ilar to the Marxian notion that "capital" uses the state and the political appa­ratus to capture benefits. In the modern theory capital or "business" does not always win. Groups of any kind, e.g., labor, farmers, or consumers, may in­stitute or take over the regulatory system at different times. In Stigler's view regulation benefits politically effective groups. Let us consider his view in more detail.