Knowledge that Transforms

Price controls lead to misallocation of goods and encourage rent seeking. The misallocation effect alone ensures that a price control always reduces consumer surplus in an otherwise-competitive market with convex demand if supply is more elastic than demand or with log-convex demand (e.g., constant elasticity) even if supply is inelastic. The same results apply whether rationed goods are allocated by costless lottery or whether costly rent seeking and/or partial decontrol mitigates the inefficiency. Our analysis exploits the observation that in any market, consumer surplus equals the area between the demand curve and the industry marginal revenue curve.

We develop a competitive equilibrium theory of a market for votes. Before voting on a binary issue, individuals may buy and sell their votes with each other. We define the concept of ex ante vote-trading equilibrium and show by construction that an equilibrium exists. The equilibrium we characterize always results in dictatorship if there is any trade, and the market for votes generates welfare losses, relative to simple majority voting, if the committee is large enough or the distribution of values is not very skewed. We test the theoretical implications in the laboratory using a continuous open-book multiunit double auction.