The Political Economy of Regulation: Origins, Distortions, and the Case for Deregulation

We examine how well-intentioned regulations often produce adverse economic and institutional consequences. While regulation can address market failures, it frequently evolves into a tool for rent-seeking, exclusion, or symbolic overreach. Using case studies from Argentina’s deregulation process, we show how rigid or discretionary rules can reduce competition, increase prices, and distort incentives. Beyond these partial-equilibrium effects, we examine whether deregulation can generate broader, economy-wide impacts through institutional channels. Argentina’s economy-wide deregulation provides a unique setting to assess these systemic effects. We document a marked post-reform decline in corruption indicators relative to comparable countries, consistent with the idea that simplifying rules and reducing regulatory discretion can lower rent-extraction opportunities and improve institutional performance at scale. Taken together, the findings underscore the need for responsible deregulation: a reform agenda focused on removing unjustified barriers, curbing discretion, and restoring state capacity through evidence-based, transparent, and regularly reviewed regulatory frameworks.