Ian A. MacKenzie, School of Economics Discussion Paper No. 548 July 2015, School of Economics, The University of Queensland.

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This article investigates prices versus quantities when regulation generates contestable rents. A two-stage process is outlined where, in stage one, a politician selects a policy level in the presence of uncertainty. In stage two, players invest in distributional rent seeking, i.e., rent-capturing activities to obtain the rents generated from regulation. A clear distinction is derived between prices, revenue-raising quantities as well as non-revenue-raising quantities. The politician’s payoff as well as equilibrium policy level are compared within a number of institutional environments, which take into account the politician’s preferences over rent-seeking transfers and social welfare. A key determinant is the interaction between the efficiency of rent transfer and the composition of rent seekers within the economy.