Rent Extraction and Rent Creation in the Economic Theory of Regulation

  • Fred S. McChesney
Part of the Topics in Regulatory Economics and Policy book series (TREP, volume 1)


The economic theory of regulation has advanced considerably since Stigler’s seminal piece explained government’s ability to create rents by cartelizing private producers.1 Because political action can redistribute wealth generally, it is now seen that private interest groups other than producers also have an incentive to organize, both to obtain the gains and to avoid the losses from a whole menu of government enactments.2 The configuration of winners and losers depends on many factors, and it changes as the underlying demands for and costs of regulation shift. New technology, for example, may render existing government regulations undesirable to their prior beneficiaries or make current regulations useful to groups previously not benefited. Finally, “government” itself has come to be treated, not as a unit, but as a complicated network of individuals, each with an incentive to maximize his own interest.


Supra Note Federal Trade Commission Private Capital Private Party Capital Owner 
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    Since Congress has always been able to annul any agency rule or regulation statutorily, the question arises why it would want a veto. Statutes to change agency action require the president’s signature. If the president must sign the statute, he then is able to exact payment for his participation in rent-protecting legislation, lowering the payments available to Congress. In eliminating the executive role, the legislative veto is hardly a check on agency action. It is an attempt to avoid splitting fees with the executive. Indeed, if Congress has a veto, it then has an incentive to fund even more rent-threatening activities by independent agencies, ceteris paribus.Google Scholar
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    The banking industry contributed millions of dollars to politicians in 1982 to obtain repeal of the statutory provision requiring banks to withhold taxes on interest and dividends. There are no precise figures on contributions to politicians to stop legislation banning gender-based insurance-rate and benefit schedules, but their magnitude may be inferred from the American Council of Life Insurance’s media budget of nearly $2 million in 1983 and 1984 to defeat the legislation. Sabato, supra note 13, at 125.Google Scholar
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© Springer Science+Business Media New York 1988

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  • Fred S. McChesney

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