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The Subsidiarity Bias in Regulation

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  • Jean-Jacques Laffont

    (IDEI and GREMAQ)

  • Jérome Pouyet

    () (CERAS-ENPC)

Abstract

We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two oppos- ite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, be- cause the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm's rent and contracts tend to be too low-powered. When the activities of the firm are suf- ficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulat- ory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari in its series series with number 0001.

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Length: 813
Date of creation: Jun 2000
Date of revision: Jun 2000
Handle: RePEc:bai:series:wp0001

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Keywords: incentives; decentralization; regulation.;

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References

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