Would you trust lobbies?

Abstract

We consider the regulatory problem to approve or to ban a new product/technology, in a context of scientific controversy about its environmental and/or health detrimental effects. We formalize the regulator decision-making as a Tullock contest (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 its environmental and/or health detrimental effects. Assuming that the industrial lobby has private information about the environmental and/or health detrimental effects, but can be held liable for damage ex post, we derive the properties of the equilibrium of the contest. In particular, we give conditions under which it is socially preferable that the regulator decides according to the contest, 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.

JEL Classification : C7 – D7 – D8.


Introduction

In recent years, several scientific and political controversies have arisen regarding the market introduction of new products and/or new technologies. Key examples are genetically modified organisms and hydraulic fracturing to extract shale gas. In both cases, a common feature is that the regulatory decision to approve, or to ban, the new product and/or new technology, faces the challenge of balancing large economic profits against uncertain (and possibly huge) environmental and/or health detrimental effects. The stylized fact is that this has lead to large differences in regulations among countries, which may reflect the preferences of various interest groups involved in the pro