Public Choice

, Volume 181, Issue 1–2, pp 141–166 | Cite as

The efficiency of regulatory arbitrage

  • Vlad TarkoEmail author
  • Andrew Farrant


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.


Regulatory capitalism Polycentricity Common law Rent-seeking Certification markets 

JEL Classification

D72 H77 P16 



We thank Jerry Ellig, Patrick McLaughlin, Matt Mitchell, and William Shughart II for very useful feed-back and suggestions.


  1. Aligica, P. D., Boettke, P. J., & Tarko, V. (2019). Public governance and the classical liberal tradition. Oxford: Oxford University Press.Google Scholar
  2. Aligica, P. D., & Tarko, V. (2012). Polycentricity: From Polanyi to Ostrom, and beyond. Governance, 25(2), 237–262.CrossRefGoogle Scholar
  3. Aligica, P. D., & Tarko, V. (2014). Crony capitalism: Rent seeking, institutions and ideology. Kyklos, 67(2), 156–176.CrossRefGoogle Scholar
  4. Aligica, P. D., & Tarko, V. (2015). Capitalist alternatives: Models, taxonomies, scenarios. London, New York: Routledge.Google Scholar
  5. Al-Ubaydli, O., & McLaughlin, P. A. (2015). RegData: A numerical database on industry-specific regulations for all United States industries and federal regulations, 1997–2012. Regulation & Governance, 11(1), 109–123.CrossRefGoogle Scholar
  6. Autor, D., Dorn D., Katz, L. F., Patterson, C., & Van Reenen, J. (2017). Concentrating on the fall of the labor share. Working paper 23108. National Bureau of Economic Research.
  7. Azar, J., Schmalz, M. C., & Tecu. I. (2018). Anticompetitive effects of common ownership. Journal of Finance, 73(4), 1513–1565.CrossRefGoogle Scholar
  8. Biser, J. J. (2014). Law-and-economics: Why Gordon Tullock prefers Napoleon Bonaparte over the Duke of Wellington; and why he may end up on St. Helena. Public Choice, 158, 261–279.CrossRefGoogle Scholar
  9. Bó, E. D. (2006). Regulatory capture: A review. Oxford Review of Economic Policy, 22(2), 203–225.CrossRefGoogle Scholar
  10. Boettke, P. J. (1995). Hayek’s The Road to Serfdom revisited: Government failure in the argument against socialism. Eastern Economic Journal, 21(1), 7–26.Google Scholar
  11. Boettke, P. J., Coyne, C. J., & Leeson, P. T. (2011). Quasimarket failure. Public Choice, 149(1/2), 209–224.CrossRefGoogle Scholar
  12. Boettke, P. J., & López, E. J. (2002). Austrian economics and public choice. Review of Austrian Economics, 15(2–3), 111–119.CrossRefGoogle Scholar
  13. Broughel, J. (2017). Regulation and economic growth. Arlington, VA: Mercatus Center.Google Scholar
  14. Buchanan, J. M. (1980). Rent seeking and profit seeking. In Toward a theory of the rent-seeking society. Texas A&M University Press.Google Scholar
  15. Buchanan, J. M., & Congleton, R. D. (1998). Politics by principle, not interest: Towards nondiscriminatory democracy. Cambridge, New York: Cambridge University Press.CrossRefGoogle Scholar
  16. Buchanan, J. M., & Goetz, C. J. (1972). Efficiency limits of fiscal mobility: An assessment of the Tiebout model. Journal of Public Economics, 1(1), 25–43.CrossRefGoogle Scholar
  17. Buchanan, J. M., & Tullock, G. (1962). The calculus of consent: Logical foundations of constitutional democracy. Indianapolis: Liberty Fund.CrossRefGoogle Scholar
  18. Buchanan, J. M., Tullock, G., & Tollison, R. (Eds.). (1980). Toward a theory of the rent-seeking society. College Station, TX: Texas A&M University Press.Google Scholar
  19. Buchanan, J. M., & Yoon, Y. J. (2000). Symmetric tragedies: Commons and anticommons. Journal of Law & Economics, 43, 1–14.CrossRefGoogle Scholar
  20. Caplan, B. (2001). Standing Tiebout on his head: Tax capitalization and the monopoly power of local governments. Public Choice, 108(1–2), 101–122.CrossRefGoogle Scholar
  21. Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405.CrossRefGoogle Scholar
  22. Congleton, R. D., & Hillman, A. L. (Eds.). (2015). Companion to the political economy of rent seeking. Northampton, MA: Edward Elgar Pub.Google Scholar
  23. Congleton, R. D., Hillman, A. L., & Konrad, K. A. (Eds.). (2008). 40 years of research on rent seeking. Berlin: Springer.Google Scholar
  24. Cowen, T. (2011). The great stagnation. Harmondsworth: Penguin.Google Scholar
  25. Cowen, T. (2017). The complacent class. New York: St. Martin’s Press.Google Scholar
  26. DeMuth, C. (2016). Can the administrative state be tamed? Journal of Legal Analysis, 8(1), 121–190.CrossRefGoogle Scholar
  27. Donahue, J. D. (1997). Tiebout? Or not Tiebout? The market metaphor and America’s devolution debate. Journal of Economic Perspectives, 11(4), 73–82.CrossRefGoogle Scholar
  28. Douglas, G. W., & Miller, J. C. (1974). Economic regulation of domestic air transport. Washington: Brookings Institution.Google Scholar
  29. Dudley, S. E., & Brito, J. (2012). Regulation: A primer (2nd ed.). Washington, DC: Mercatus Center at George Mason University and George Washington University Regulatory Studies Center.Google Scholar
  30. Ellig, J. (1995). Why do regulators regulate? The case of the southern California gas market. Journal of Regulatory Economics, 7(3), 293–308.CrossRefGoogle Scholar
  31. Geradin, D., & McCahery, J. A. (2004). Regulatory co-opetition: Transcending the regulatory competition debate. In J. Jordana & D. Levi-Faur (Eds.), The politics of regulation. Cheltenham, UK; Northampton, MA: Edward Elgar.Google Scholar
  32. Goetz, G. (2010). Who inspects what? A food safety scramble. Food Safety News. December 16, 2010.
  33. Goldschlag, N., & Tabarrok, A. (2018). Is regulation to blame for the decline in American entrepreneurship? Economic Policy, 33, 5–44.CrossRefGoogle Scholar
  34. Grullon, G., Larkin, Y., & Michaely, R. (2017). Are US industries becoming more concentrated? Working paper,
  35. Guy, A. (2016). You’re probably eating Asian catfish without knowing it. Should you be worried? Oceana. September 13, 2016.
  36. Gwartney, J. D., Lawson, R., & Hall, J. (2018). Economic freedom of the world: 2018 annual report. Vancouver: The Fraser Institute.Google Scholar
  37. Hamburger, P. (2014). Is administrative law unlawful?. Chicago: University of Chicago Press.CrossRefGoogle Scholar
  38. Hayek, F. A. (1944). The road to serfdom. Chicago: University of Chicago Press.Google Scholar
  39. Heller, M. (1998). The tragedy of the anticommons: Property in the transition from Marx to markets. Harvard Law Review, 111(3), 621–688.CrossRefGoogle Scholar
  40. Heller, M. (2008). The gridlock economy: How too much ownership wrecks markets, stops innovation, and costs lives. New York: Basic Books.Google Scholar
  41. Heller, M. (2013). The tragedy of the anticommons: A concise introduction and Lexicon. Modern Law Review, 76, 6–25.CrossRefGoogle Scholar
  42. Higgins, R. S., Shughart, W. F., II, & Tollison, R. D. (1988). Free entry and efficient rent-seeking. In C. K. Rowley, R. D. Tollison, & G. Tullock (Eds.), The political economy of rent-seeking (pp. 127–139). Boston, MA: Springer.CrossRefGoogle Scholar
  43. Howell-Moroney, M. (2008). The Tiebout hypothesis 50 years later: Lessons and lingering challenges for metropolitan governance in the 21st Century. Public Administration Review, 68(1), 97–109.CrossRefGoogle Scholar
  44. Jordana, J., & Levi-Faur, D. (Eds.). (2004). The politics of regulation: Institutions and regulatory reforms for the age of governance. Cheltenham, UK; Northampton, MA, USA: Edward Elgar.Google Scholar
  45. Kwoka, J. (2014). Mergers, merger control, and remedies: A retrospective analysis of US policy. Cambridge, MA: The MIT Press.CrossRefGoogle Scholar
  46. Levi-Faur, D. (2005). The global diffusion of regulatory capitalism. Annals of the American Academy of Political and Social Science, 598(1), 12–32.CrossRefGoogle Scholar
  47. Lindsey, B., & Teles, S. (2017). The captured economy: How the powerful enrich themselves, slow down growth, and increase inequality. New York, NY: Oxford University Press.Google Scholar
  48. Lowery, D. (1998). Consumer sovereignty and quasi-market failure. Journal of Public Administration Research and Theory, 8(2), 137–172.CrossRefGoogle Scholar
  49. Lowery, D., & Lyons, W. E. (1989). The impact of jurisdictional boundaries: An individual-level test of the Tiebout model. Journal of Politics, 51(01), 73–97.CrossRefGoogle Scholar
  50. McChesney, F. S. (1987). Rent extraction and rent creation in the economic theory of regulation. The Journal of Legal Studies, 16(1), 101–118.CrossRefGoogle Scholar
  51. McChesney, F. S. (1997). Money for nothing: Politicians, rent extraction, and political extortion. Cambridge, MA: Harvard University Press.Google Scholar
  52. McPhail, E., & Tarko, V. (2017). The evolution of governance structures in a polycentric system. In M. Altman (Ed.), Handbook of behavioral economics and smart decision-making (pp. 290–313). Cheltenham, UK; Northampton, MA: Edward Elgar Publishing.CrossRefGoogle Scholar
  53. Meltzer, A. H. (2012). Why capitalism?. Oxford, New York: Oxford University Press.Google Scholar
  54. Miller, J. C., Shughart, W. F., II, & Tollison, R. D. (1984). A note on centralized regulatory review. Public Choice, 43(1), 83–88.CrossRefGoogle Scholar
  55. Mitchell, M., & Stratmann, T. (2015). A tragedy of the anticommons: Local option taxation and cell phone tax bills. Public Choice, 165, 171–191.CrossRefGoogle Scholar
  56. Mueller, D. C. (2003). Public choice III. Cambridge, New York: Cambridge University Press.CrossRefGoogle Scholar
  57. Olson, M. (1982). The rise and decline of nations. New Haven: Yale University Press.Google Scholar
  58. Ostrom, E. (1990). Governing the commons: The evolution of institutions for collective action. Cambridge; New York: Cambridge University Press.CrossRefGoogle Scholar
  59. Ostrom, V. (1991). Polycentricity: The structural basis of self-governing systems. In The meaning of American federalism, 223–248. San Francisco, CA: ICS Press.Google Scholar
  60. Ostrom, V. (1997). The meaning of democracy and the vulnerabilities of democracies. Ann Arbor: University of Michigan Press.CrossRefGoogle Scholar
  61. Ostrom, V., Tiebout, C. M., & Warren, R. (1961). The organization of government in metropolitan areas. American Political Science Review, 55(04), 831–842.CrossRefGoogle Scholar
  62. Peltzman, S. (1989). The economic theory of regulation after a decade of deregulation. In Brookings papers on economic activity, 1–41. Washington, DC: Brookings Institution.Google Scholar
  63. Peltzman, S. (1993). George Stigler’s contribution to the economic analysis of regulation. Journal of Political Economy, 101(5), 818–832.CrossRefGoogle Scholar
  64. Posner, R. A. ([1973] 2003). The economic analysis of law (6th edn.). New York: Aspen.Google Scholar
  65. Powell, B. (2004). Competition and monopoly power in local government. Public Choice, 120(3/4), 353–357.CrossRefGoogle Scholar
  66. Rajagopalan, S., & Wagner, R. E. (2013). Constitutional craftsmanship and the rule of law. Constitutional Political Economy, 24, 295–309.CrossRefGoogle Scholar
  67. Shughart II, W. F. (2018). Gordon Tullock’s critique of the common law. Independent Review, 23(2).Google Scholar
  68. Steele, C., & Bowman, J. (1987). The constitutionality of independent regulatory agencies under the necessary and proper clause: The case of the Federal Election Commission. Yale Journal on Regulation, 4(2), 363–392.Google Scholar
  69. Stigler, G. J. (1971). The theory of economic regulation. The Bell Journal of Economics and Management Science, pp. 3–21.Google Scholar
  70. Tiebout, C. M. (1956). A pure theory of local expenditures. Journal of Political Economy, 64(5), 416–424.CrossRefGoogle Scholar
  71. Tollison, R. D. (1982). Rent seeking: A survey. Kyklos, 35(4), 575–602.CrossRefGoogle Scholar
  72. Tullock, G. (1971). The logic of the law. New York: Basic Books.Google Scholar
  73. Tullock, G. (1980a). Efficient rent seeking. In J. M. Buchanan, R. D. Tollison, & G. Tullock (Eds.), Toward a theory of the rent-seeking society (pp. 97–112). College Station: Texas A&M University Press.Google Scholar
  74. Tullock, G. (1980b). Trials on trial: The pure theory of legal procedure. New York: Columbia University Press.Google Scholar
  75. Tullock, G. (1991). Rent seeking. In The new Palgrave: The world of economics, (pp. 604–609). New York, London: W.W. Norton.Google Scholar
  76. Tullock, G. (2005a). Law and economics. Indianapolis: Liberty Fund.Google Scholar
  77. Tullock, G. (2005b). The rent-seeking society. Indianapolis: Liberty Fund.Google Scholar
  78. Viscusi, W. K. (1996). Regulatory reform and liability for pharmaceuticals and medical devices. In Advancing medical innovation: Health, safety and the role of government in the 21st century. Washington, DC: Progress and Freedom Foundation.Google Scholar
  79. Vogel, S. K. (1996). Freer markets, more rules: Regulatory reform in advanced industrial countries. Ithaca, London: Cornell University Press.Google Scholar
  80. Wagner, R. E. (1989). To promote the general welfare: Market processes vs. political transfers. San Francisco, CA: Pacific Research Inst for Public.Google Scholar
  81. Wagner, R. E. (2009). Property, state, and entangled political economy. In Markets and politics (pp. 37–49). Marburg: Metropolis.Google Scholar
  82. Wagner, R. E. (2016). Politics as a peculiar business: Insights from a theory of entangled political economy. Cheltenham, UK: Edward Elgar Pub.CrossRefGoogle Scholar
  83. Williamson, O. E. (1996). The mechanisms of governance. Oxford, New York: Oxford University Press.Google Scholar
  84. Zywicki, T. J. (2008). Spontaneous order and the common law: Gordon Tullock’s critique. Public Choice, 135, 35–53.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Economics DepartmentDickinson CollegeCarlisleUSA

Personalised recommendations