Would you trust lobbies?

Pierre Fauvet and Sébastien Rouillon

Public Choice, 2016, vol. 167, issue 3, No 2, 219 pages

Abstract: Abstract We consider the regulatory problem to approve or to ban a new product/technology in the context of scientific controversy about its detrimental environmental and/or health effects. We formalize the regulator’s decision-making process as a Tullock contest (Towards a Theory of the Rent-Seeking Society, Texas A&M University Press, Texas, 1980), the contestants being an industrial lobby, representing the economic agents who have developed the new product/technology, and an environmental lobby, representing the economic agents who will be harmed by the product or technology. Assuming that the industrial lobby has private information about the unfavorable environmental and/or health effects, but can be held liable for damage ex post, we derive the equilibrium properties of the contest. In particular, we derive conditions under which it is socially preferable for the regulator to decide according to the contest’s outcome, rather than according to an ex ante cost-benefit analysis, using his prior beliefs. We find that the contest outperforms the ex ante cost-benefit analysis only if the risk of judgment-proofness is not too high.

Keywords: Contest model; Information asymmetry; Law and economics; Optimal regulation (search for similar items in EconPapers)
JEL-codes: C7 D7 D8 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11127-016-0336-5

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