Market Power Corrupts
By Arnold Kling
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.