Arnold Kling  

Market Power Corrupts

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Werner Troesken writes,


Why are occasional regime changes desirable for public utility markets? The answer builds on three observations. First, corruption was endemic to public utility industries; corruption existed, in some form, across all regulatory and ownership regimes. Second, regime change did not eliminate corruption; it only altered the type of corruption observed. For example, under state regulation corruption flourished as industry capture, while under municipal ownership corruption flourished as patronage. Third, for any type of governance regime, corruption grew increasingly severe over time, and at some point, became politically untenable. When corruption became politically untenable, politicians intervened and replaced the existing and utterly corrupt governance regime with a new regime. The institutional change broke the fully-matured and corrupt relationships of the old regime, and replaced them with new corrupt relationships that also eventually matured and flourished, but that maturation took time, and at least initially, the new governance regime was associated with much less corruption than the old regime.

His thesis is that industries with high barriers to entry and exit, such as electrical utilities, will tend to be corrupt under any institutional regime. High potential profits from exploiting market power give rise to corruption. On the other hand, competitive industries offer less scope for corruption.

I wonder if this does not pose a problem for the information age. Many information goods, from pharmaceuticals to software, are characterized by high fixed costs of production and low marginal costs of manufacture and distribution. Troesken's theory would predict that there would be a lot of corruption in these industries, as firms try to use government to secure their positions in the market. To some extent, politicians try to shake down Microsoft and Big Pharma. But why aren't the shakedowns even more onerous?

By the same token, I would think that agriculture is relatively competitive, and it ought to be less corrupt. Yet we have lots of agriculture subsidies.

I find Troesken's theory plausible. But these examples give me pause.


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COMMENTS (5 to date)
Caliban Darklock writes:

I think the picture is incomplete. The barrier to entry must not only be high, but those barriers must be artificially enforceable.

In agriculture, you need a farm. That's a high barrier to entry that is artificially enforceable through property taxes and licensing. In electrical utility provision, you need expensive wires and towers and generators, a barrier artificially enforceable through various regulatory means.

But look at cryptography. The barrier to entry is high, because crypto math is $#@!ing hard, but it's not artificially enforceable - you can't run around going "That math is too hard! You're not licensed to do that math!" in any rational fashion. (This doesn't stop the NSA from trying numerous variations of it.) So cryptography is subject to very little corruption, because there's no way to lock it up and keep the genie in the bottle.

That's how I see it, anyway.

Alex J. writes:

It seems to me that farmers are beneficiaries of the fact that the public irrationally finds them to be especially charismatic. The minds of the public are fertile ground for disinformation about the good that farm subsidies can produce. A woman once explained to me that farm subsidies were needed because otherwise the US might find itself blockaded in a war and unable to feed itself.

Pharmaceutical and software producers do indeed benefit from government intervention to make them more profitable than otherwise: intellectual property rights. Subsidizing information goods is what ip is for. As for corruption in ip consider the eternally growing copyrights. In software, patents are compared to nuclear weapons. Every major company keeps some lying around just in another company tries to enforce its patent rights.

TGGP writes:

Sounds like another great opportunity for me to plug The Myth of Natural Monopoly which discusses some of the history of public utilities.

Stan writes:

A question I have is: If free markets, and law and order, are genuinely good for growth of countries, then how come there is not really a market for free markets? Why are countries not racing to lower regulations and power and taxes to attract the best businesses?

Sudhir Jain writes:

In short, anything growing out of proportions would give rise to corruption. - general theory of corruption

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