The Dynamics of a Policy Outcome: Market Response and Bureaucratic Enforcement of a Policy Change

Dana Foarta, Steven Callander and Takuo Sugaya

No 17556, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Policy outcomes are determined not by the words in a statute but by the actions induced in response. Whether a policy succeeds or fails depends on how policy shapes behavior and how that behavior, in turn, shapes the future course of policy. To understand this process, we develop a model that explicitly combines the political and non-political domains, focusing on competition policy and the regulation of markets. We show how the outcome of a change in policy develops over time as firms respond in the market and interact with bureaucratic enforcement. We identify a critical threshold in market structure that determines whether a policy succeeds or fails, and discuss how the design of political institutions can affect this level. The threshold represents a balancing of the path-dependence of politics with the self-correcting nature of markets. It establishes when political forces dominate those in markets and, thus, when a policy change will have a lasting effect on society.

Date: 2022-10
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