Theory of competitive regulatory equilibrium

Abstract

The power of the state to regulate the price of a good or service is the power to create a social surplus the difference between social benefits and social costs. The capitalized value of this surplus may be thought of as the 'product' of the law which creates it. We can typically decompose this product into two joint products: The capitalized value of consumer surplus and the capitalized value of producer surplus. The external incentive a regulator faces in his choice of a regulatory policy depends on the willingness of consumer and producer groups to compensate him in return for the surplus they realize. The nature of the compensation (votes, money payments, election support, etc.) as well as its magnitude depend upon the nature of the political system and upon the institutional characteristics of the adversary groups. If competition for the post of regulator exists, the regulator's compensation depends upon his own regulatory strategy vis-A-vis the strategy of an opponent. A competitive regulatory equilibrium will be said to exist if there is a regulatory policy which cannot be defeated by any other. The equilibrium will be said to be unique if there is one and only one policy which satisfies the conditions of competitive equilibrium. If there is a unique competitive regulatory equilibrium, the regulator has no choice about the policy he pursues. If he fails to choose the equilibrium policy, he invites replacement. In this sense, regulatory policy is beyond the control of those who regulate and is determined instead by the ability of regulators to create consumer and producer surplus and the willingness of interested groups to compensate the proponents of policies they prefer. The economic theory of competitive regulatory equilibrium has its roots in the pioneering work of George Stigler (1971). It has been elaborated by Posner (1974) and formalized by Peltzman (1976) and Becker (1983), who presented comparative statics results with empirical implications. These writers take the