On the Generic Occurrence of Price Regulations

There exists an extensive literature on economies with price rigidities, where some constraints on the set of admissible price systems are exogenously given. In this paper a model of a political economic system is described where the price rigidities are endogenously chosen by political candidates. The economic system is modelled by a general equilibrium model and the political system as a game between political candidates who maximize political supports. Conditions for the existence of a political economic equilibrium and characterizations of this equilibrium are given. Moreover, it is shown that, generically, political candidates will not choose price regulations leading to a Walrasian equilibrium, but instead will impose price regulations upon the economic system which exclude all Walrasian equilibria and therefore lead to rationing of consumers.