The efficiency of regulatory arbitrage
Classic public choice skepticism about the regulatory state, based on theories of rent-seeking, rent extraction and regulatory capture, is based on the unrealistic, and usually unstated, assumption of a monopolist regulator. In practice, the regulatory state is polycentric, involving numerous quasi-independent agencies with overlapping responsibilities. This has led to a more optimistic picture based on the idea of regulatory arbitrage: when firms can, to some extent, pick and choose their preferred regulator, regulatory agencies are constrained to deliver relatively efficient regulatory policies. In our view, this optimism is also unrealistic. We build a family of models that explores the possible regulatory outcomes, and use some aspects of Gordon Tullock’s critique of the common law as a conceptual foundation for the analysis of the efficiency of a polycentric regulatory system.
KeywordsRegulatory capitalism Polycentricity Common law Rent-seeking Certification markets
JEL ClassificationD72 H77 P16
We thank Jerry Ellig, Patrick McLaughlin, Matt Mitchell, and William Shughart II for very useful feed-back and suggestions.
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