Deregulation despite transitional gains

Abstract

Acemoglu and Robinson (in The American Economic Review 90(2):126–130, 2000) argue that historically economic rents have been less of a barrier to regulatory reform and innovation than political rents. Contrary to this conclusion, I argue that the important margin of distinction for factors preventing deregulation is not whether rents are economic or political, but rather what alternative profit opportunities are available and how innovation has changed the entrepreneurial opportunity set. Using the example of medieval Cologne, I show that the transitional gains trap framework, as developed by Tullock (in The Bell Journal of Economics 6(2):671–678, 1975), applies in a static environment and can successfully prevent reform over long periods of time, but that neither political nor economic entrepreneurs will ignore an opportunity for increased profitability in the long run. In addition, the organization of the political unit to which the regulation applies can determine the persistence of said regulation.