The Social Costs of Rent-Seeking in the Regulation of Vehicle Exhaust Emission

Abstract

The regulation of vehicle exhaust emission requires the regulators to establish the vehicle exhaust emission level desirable for the society and then select inspection agencies to check every registered vehicle periodically. Both these decisions create opportunities for rent seeking. In this paper, we present the incentives of rent-seekers for being selected as inspection agencies and analyze the consequences for social welfare. We find differences in firms' rent-seeking choices compared to a traditional rent-seeking model. We see that a fundamental aspect of firms' incentives to seek rent depends on the number of incumbent inspection agencies and the present value of every successful rent-seeker's rent income, which mainly depends on the distortion degree of inspection process and which is inversely related to social welfare.