The Efficiency of Regulatory Arbitrage
41 Pages Posted: 20 Nov 2018 Last revised: 11 Dec 2018
Date Written: November 13, 2018
Classic public choice skepticism about the regulatory state, based on theories of rent-seeking, rent extraction and regulatory capture, is based on the unrealistic, and usually unstated, assumption of a monopolist regulator. In practice, the regulatory state is polycentric, involving numerous quasi-independent agencies with overlapping responsibilities. This has led to a more optimistic picture based on the idea of regulatory arbitrage: when firms can, to some extent, pick and choose their preferred regulator, regulatory agencies are constrained to deliver relatively efficient regulatory policies. In our view, this optimism is also unrealistic. We build a family of models that explores the possible regulatory outcomes, and use some aspects of Gordon Tullock’s critique of the common law as a conceptual foundation for the analysis of the efficiency of a polycentric regulatory system.
Keywords: regulatory capitalism, polycentricity, common law, rent-seeking, certification markets
JEL Classification: D72, H77, P16
Suggested Citation: Suggested Citation