Can rents run uphill?: A note on the theory of regulation

Abstract

No one familiar with the history of regulation would be surprised that inefficient firms can benefit at the expense of the efficient, yet this outcome has not been analyzed within the standard rent-seeking models. This paper has derived conditions under which less-efficient firms can profitably secure regulation that imposes costs on their more efficient rivals. The possibility that less-efficient firms can form a profitable coalition does not mean that they will actually do so. We have analyzed only the polar situations in which inefficient firms form a coalition to put efficient firms out of business, and efficient firms try to block the regulation by offering counter bids. The actual formation of coalitions will depend on political entrepreneurship (McChesney, 1987), the opportunity costs of various producers (Fort and Hallagan, 1987), and the particular cost functions of forming a coalition, functions that may well differ among various firms. I have placed these influences in the ceteris paribus pound in order to analyze the demand and supply conditions that are conducive to successful rent-seeking by less-efficient firms. The theoretical demonstration that less-efficient firms can outbid their more efficient counterparts for legislation, and still earn profits, helps explain a common regulatory outcome.