The Dynamics of a Policy Outcome: Market Response and Bureaucratic Enforcement of a Policy Change

Abstract

Policy outcomes are determined not by the words in a statute but by the actions of private citizens. A policy's success or failure depends on how it shapes behavior and how that behavior shapes the future course of policy. To understand this process, we develop a model that combines the political and nonpolitical domains, focusing on competition policy and the regulation of markets. We show how the outcome of a policy change develops over time as firms respond in the market and interact with bureaucratic enforcement. We identify a critical threshold in market structure that determines whether a policy succeeds or fails, and discuss how the design of political institutions affects this level. The threshold represents a balancing of the path dependence of politics with the self-correcting nature of markets. It establishes when political forces dominate those in markets and, thus, when a policy change has lasting effects on society.