Lobbying, Voting, and the Political Economy of Price Regulation

Gerald R. Faulhaber*

Abstract:
Is the cure of regulation always superior to the disease of market failure?
This paper shows, in the context of a structural voting model, that
voter-determined prices can lead to lower aggregate welfare than unregulated
monopoly. Extending the voting model to incorporate lobbying, I examine the
Becker (1983) hypothesis that lobbying can improve the efficiency of political
outcomes by giving voice to economic interests under-represented in the
political process. However, lobbying is costly (the Posner (1975)
costly-rent-seeking hypothesis); the model suggests that competitive lobbying
costs more than offset the increase in efficiency. The model is further
extended to a "concentrated ownership" economy; if stockholders hold the market
portfolio and actively control firms' lobbying expenditures, then costly
rent-seeking is muted, greater efficiency obtains, but often at the cost of
reversing the cross-subsidies preferred by voters to those preferred by
stockholders.

JEL Classification Codes: D72, L51
Keywords: Regulation, Political Economy, Median Voter, Lobbying,
Telecommunications, Pricing.