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

The forthcoming article “The Dynamics of a Policy Outcome: Market Response and Bureaucratic Enforcement of a Policy Change” by Steven Callander, Dana Foarta, and Takuo Sugaya is summarized by the authors below.

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 non-political domains, focusing on competition policy and the regulation of markets.  

The interaction of politics and markets is as relevant today as it has ever been. Calls to more tightly regulate markets have reached a crescendo. From calls to regulate “Big Tech”, and even break them up, to protests that antitrust policy is too lax and regulators are captured, politicians and activists are calling for policy to change to shape market outcomes toward a different goal. 

But that goal is not so easy to obtain. How politicians can achieve their desired outcome – and even if they can – is determined not by their own resolve, but by how markets respond to a policy change. 

Our model captures the dynamic interaction of markets and politics. We focus on a particular policy change that opens a market to competition. Our main result is to identify a threshold in the fundamental structure of a market – outside of politics – that determines whether a policy change will succeed or fail. 

If competition can reach a level beyond that threshold, it will persist and the policy change will succeed in opening the market to competition. If, however, competition does not reach the threshold, it will backslide, so that competition contracts and the market reverts to monopoly. In this case, the policy change leaves no lasting mark on society. Surprisingly, we show that when a policy change is doomed to fail, it actually leads to more competition initially, so that what seems like a successful policy change is actually an indication of inevitable failure. 

Our results provide an intriguing supplement to Paul Pierson’s distinction between path dependence in politics and the mean-reverting properties of markets. In combining both forces into a single model, we identify when politics dominates markets and when markets win out. This opens a new dimension to understanding policy change and the design of political institutions. It makes clear that an institution’s impact rests not on the policy it produces, but on how that policy changes society. Our research shows that incorporating the dynamic interaction of markets with politics is essential to understanding policy change.