Regulations, risk, and rent seeking behaviour

This paper seeks to address how political risk influences behaviour, in particular rent seeking behaviour. Such risk is important in many industries, which posts challenges both for policy makers and economic agents. This paper studies how political uncertainty affects rent seeking, and what level of political uncertainty is “optimal” for society. We find that under some conditions, a higher level of political uncertainty might be beneficial to discourage rent seeking. On the other hand, high risk aversion among the agents decreases the optimal level of uncertainty, as risk averse agents suffer a higher loss in utility from a high uncertainty. It is possible to find several areas where this analysis is relevant. For instance, in fisheries, increasing uncertainty about whether or not to implement (or extend) a pay-back scheme will reduce the incentives for the fishermen to overinvest in vessels