Selective enforcement and rent extraction.

Author:Cartwright, Alexander C.
Position::Essay
 
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  1. INTRODUCTION

    Why aren't all laws enforced? The traditional answer is that there is a cost to marshaling all the resources necessary to enforce a law and the state faces a budget constraint for enforcement (Becker & Stigler, 1974). Rational enforcement occurs when the expected penalties of breaking the law are met with increased punishment such that on net there is no marginal gain from committing larger offenses; this doesn't require laws to be enforced in all instances (Stigler 1970). However, a cost to enforcing the law often neglected by economists is that of the forgone opportunity for extortion. Since laws impose constraints on those subject to the laws, rule followers are often willing to pay in order to avoid being subject to the rule; by choosing to enforce the law, those with the authority to enforce the law effectively sacrifice their subjects' willingness to pay for an exemption.

    Economists have well documented how the willingness to pay for a legal exemption from a rule leads government to create rents for firms (Stigler 1974, Krueger 1974, Tullock 2005). However, a willingness to pay for legal exemption from a rule need not manifest itself in rent seeking, it could also 1 2 result in rent extraction. In the case of rent extraction, lawmakers extort payment in exchange for some inaction. This paper uses public choice theory and the rent extraction framework to explain why some laws are selectively enforced; specifically, the author extends the rent extraction framework to explain how selectively enforcing laws can also be a form of rent extraction.

    This paper contributes to the literature on regulation, specifically regulation that is rent extracting. Beginning the 1970's economists began to question the prevailing welfare model of regulation (Posner 1971 and Stigler 1974). Stigler (1974) explained that if producers stand to gain from regulation, they would demand regulation from politicians. Not only did Stigler cast doubt on the on the welfare model of regulation, but also he framed regulation as an exchange between business and government. McChesney (1997) points out that this view conceptualizes politicians as mere brokers in the exchange. Politicians' own utility functions and constraints are not present in this theory of regulation (McChesney suggests Tullock (1993, p. 26) as an example).

    Peltzman (1976) improved the Stiglerian model by allowing politicians and business to share in created rents and argued that regulators allocate benefits across their constituent (consumer and producer) groups to maximize political gain. Peltzman does realize that politicians threaten to transfer consumer surplus to producers who can regain some of the surplus at a price, but his model does not recognize that this threat leads to wealth losses instead of mere transfers (3).

    McChesney (1997) further integrates the politician into the theory of regulation by examining politicians' utility functions, constraints, and the methods politicians employ to improve their gains. By considering politicians' constraints, McChesney is able to highlight a weakness in the Stiglerian approach: "in a standard market model of exchange, including auctions, politician-brokers respond to private demands for rents with a supply of regulation, but they do not actively enter the market for rents with their own demands" (McChesney 1997, p 17). McChesney's objection to the standard Stiglerian view gave rise to the theory of rent extraction.

    Given a framework that considers politicians as participants, instead of simply brokers, in the regulatory exchange, McChesney theorizes that if the expected costs of the act threatened exceed the value of what the private parties must give up to avoid government action, private parties will surrender what government demands. He calls this phenomena rent extraction (McChesney 1987, 1991, 1997). The McChesney rent extraction framework does not significantly differ from the Stiglerian model, but it denies consumer sovereignty in regulatory models by pointing out that the bidders for a given group's surplus always include the group itself.

    The rent extraction framework doesn't exclude traditional rent seeking, rather the framework explains that rent seeking will only occur under certain conditions. "Whether or not a firm will benefit from rent seeking depends on the elasticity of demand. Some firms will pay to keep regulation out" (McChesney 1997, p. 25). McChesney also explains "[i]n the absence of transactions costs, all regulatory activity would be rent extraction. Existing owners of rights to future capital flows or present wealth will always pay at least as much, and usually more, to keep what they have rather than have it transferred away." (McChesney 1997, p. 155).

    The standard rent extraction model involves payments to withdraw or retract a proposed law. McChesney explains how legislators often create 'milker' bills to extract rents from different groups. Milker bills are bills proposed with the intention of retracting the proposal once sufficient rents have been collected from those groups or corporations who stand to be adversely affected by the proposed bill. If a legislator is able to credibly threaten to pass the milker bill, stakeholders will be willing to pay the lawmaker to retract it. The rent extraction literature has documented a host of instances where lawmakers have successfully utilized milker bills to extract rents (see McChesney 1997, R. Beck, C. Hoskins and J. M. Connolly 1992, and Schweizer 2013).

    While milker bills are the most studied form of rent extraction, rent extraction can occur anytime a politician withholds action that would destroy existing private rents. This paper argues that selective enforcement of law can be another type of rent extraction. Just as politicians are paid to not enact a milker bill, a politician can also extract rents from ensuring that a law is not enforced in exchange for rents. In light of the theory of rent extraction, section 2 of the paper will develop the selective enforcement mechanism further and explain how it is a particularly effective tool for rent extraction. Section 3 will provide a case study of the selective enforcement mechanism, and Section 4 will offer some implications.

  2. THE SELECTIVE ENFORCEMENT MECHANISM AND ITS MERITS

    Selective enforcement occurs when government actors strategically refrain from enforcing a law in order to extort rents from those subject to the law. There are, generally, two types of situations that motivate politicians to selectively enforce law: those subject to rules have become accustomed to lax enforcement such that enforcing the rules would impose a great cost on them; this is extortion. Or, the current enforcement of rules imposes such a constraint on those subject to them that rule bound actors are willing to pay politicians to refrain from enforcing the rule; this is bribery. In both cases, enforcing the law places a high enough cost on those subject to the rule that lawmakers can offer an exchange profitable for both parties--citizens pay politicians to ensure the rules are not enforced. This paper focuses only on selective enforcement that involves extortion. (4) In order for a law to be selectively enforced the gains of breaking the law must be clearly higher than the costs of changing one's behavior in the event the law is enforced. In that instance, the expected costs of the act threatened exceed the value of what the private parties must give up to avoid government action, so private parties choose to surrender to government demands. Recall that in the McChesney rent extraction framework lawmakers extract rents by threatening to pass a milker bill. The same rent extraction framework can be applied to cases where government threatens to enforce an already existing law (5). In both cases government threatens to change the status quo unless citizens comply with the rent extractors' demands.

    The language and intent of law is often sufficiently ambiguous to provide for a variety of interpretations and subjective evaluations of different criteria; this ambiguity (whether intentional or not) provides another avenue for rent extraction. The selective enforcement concept encompasses rent extraction that arises from ambiguities in the law. For example, construction permit approvals typically require some kind of subjective evaluation of an applicant's qualifications. Those charged with making those subjective valuations stand in a position to extract rents in exchange for approval. This type of activity is certainly commonplace, but is only a subset of selective enforcement. In circumstances where the law is ambiguous or the law requires a law enforcer to subjectively evaluate citizen eligibility for approval, citizens are asking for permission to do something based on established criteria, but selective enforcement of law can also involve actions that are universally and unambiguously illegal, yet, permitted. Ambiguous and subjectively determined aspects of law could be selectively used against citizens in order to extract rents, but such actions are only a type of selective enforcement as described above.

    Selective enforcement is also distinct from (but supported by) sparse enforcement. As discussed in Section 1, law enforcers are typically charged with enforcing more laws than their time or material resources permit them to enforce, so not all laws are enforced. The fact that law enforcers face a tradeoff between enforcing different laws does not imply that there is a bias in determining which laws are enforced. In other words, law enforcers' constraints necessitate that some laws go unenforced, but it does not necessitate that laws be enforced tendentiously. Extending the rent extraction framework to include selective enforcement provides an explanation regarding which laws are enforced: (6) the unenforced laws are those who affect citizens with rents that can be extracted.

    Critical examination...

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