24 June 2013

He Said It: McChesney

"Even if politicians eventually allow themselves to be bought off, their minatory presence reduces the expected value of entrepreneurial ability and specific-capital investments. The possibility that government may reduce returns to their capital unless paid off reduces firms' incentives to invest in the first place. It also induces inefficient shifts to investment in more mobile or salvageable (that is, less firm specific) forms of capital as insurance against expropriation. In either event, the allocative losses from politicans' ability to extract the returns from private capital are measured by investments that are never made in the industry threatened."

--Fred S. McChesney, "Rent Extraction and Rent Creation in the Economic Theory of Regulation," The Journal of Legal Studies 16, 1 (January 1987): 101-118. 

[Editorial comment: Frédéric Bastiat, call your office!]

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