Tullock and the welfare costs of corruption: there is a “political Coase Theorem”

Abstract

Gordon Tullock developed an approach to understanding dynamic processes of political change and policy outcomes. The key insight is the notion that political insiders have a comparative advantage—because they face lower transaction costs—in manipulating rules. The result is that political actors can collect revenues from threatening to restrict, or offering to loosen, access to valuable permissions, permits, or services. To the extent that the ability to pay for such favorable treatment is a consequence of private activities that produce greater social value, there is a “political Coase theorem”: corruption makes bad systems more efficient. But the dynamic consequences are extremely negative, because of the inability to institute reforms resulting from application of Tullock’s “transitional gains trap.”