Chaos and Misallocation under Price Controls

2026-02-12

AI Summary

This study demonstrates that price controls, by eliminating arbitrage incentives, induce severe cross-market misallocation and welfare losses. The authors develop a general equilibrium model showing that price ceilings render suppliers indifferent across destinations, causing even minor cost differences to trigger extreme corner allocations. They introduce a “Chaos Theorem” that identifies a novel misallocation mechanism distinct from aggregate output contraction or within-market inefficiencies. Using nonparametric methods and piecewise-linear demand functions, they derive bounds on misallocation losses based solely on aggregate constraints, without requiring structural parameters. Calibration using U.S. gasoline station data from the 1973–74 oil crisis reveals that these misallocation losses can be one to nine times larger than the traditional Harberger triangle.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Multiagent Systems: Mechanism Design
• Search and Optimization: Combinatorial Optimization

Application Category

• Economics, Online Markets and Human Computation: The sharing economy
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs
• Security and Privacy: Large-scale security measurements

Abstract

Price controls kill the incentive for arbitrage. We prove a Chaos Theorem: under a binding price ceiling, suppliers are indifferent across destinations, so arbitrarily small cost differences can determine the entire allocation. The economy tips to corner outcomes in which some markets are fully served while others are starved; small parameter changes flip the identity of the corners, generating discontinuous welfare jumps. These corner allocations create a distinct source of cross-market misallocation, separate from the aggregate quantity loss (the Harberger triangle) and from within-market misallocation emphasized in prior work. They also create an identification problem: welfare depends on demand far from the observed equilibrium. We derive sharp bounds on misallocation that require no parametric assumptions. In an efficient allocation, shadow prices are equalized across markets; combined with the adding-up constraint, this collapses the infinite-dimensional welfare problem to a one-dimensional search over a common shadow price, with extremal losses achieved by piecewise-linear demand schedules. Calibrating the bounds to station-level AAA survey data from the 1973-74 U.S. gasoline crisis, misallocation losses range from roughly 1 to 9 times the Harberger triangle.

Problem

• price controls
• misallocation
• chaos theorem
• corner solutions
• welfare identification

Innovation

• Chaos Theorem
• price controls
• misallocation
• shadow prices
• nonparametric bounds