The New Political Economy of Regulation: Looking for Positive Sum Change in a Zero Sum World

Abstract

Economists and others have long argued that the American regulatory system is unnecessarily inefficient. Critics charge that the system is both substantively inefficient, in that it sometimes specifies inefficient means for achieving a regulatory goal, and procedurally inefficient, in its over-reliance on rules. These arguments have led to a wave of regulatory reform experiments in the federal bureaucracy, many of which seek to promote positive-sum changes in regulatory policy through bargaining among private- and public-sector stakeholders. As several commentators have noted, most of these regulatory reforms have not met expectations in that participants in the bargaining process sometimes forgo positive-sum changes in the status quo. Those same commentators have offered a variety of explanations for these failures, most of which (we argue) are unpersuasive. We propose an another explanation drawn from the standard bargaining literature in economics. We argue that in the context of political conflict over policy changes, participants in these bargaining processes view positive sum policy changes in zero sum terms. That is, they bargain strategically, using their power to veto these positive-sum changes in order to extract further policy concessions from other stakeholders. This revelation has important implications for the future of this kind of regulatory reform.

JEL Classification: L50, L51