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The Political Economy of Regulatory Risk

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  • Roland Strausz

Abstract

This paper investigates political uncertainty as a source of regulatory risk. It shows that political parties have incentives to reduce regulatory risk actively: Mutually beneficial pre–electoral agreements that reduce regulatory risk always exist. Agreements that fully eliminate it exist when political divergence is small or electoral uncertainty is appropriately skewed. These results follow from a fluctuation effect of regulatory risk that hurts parties and an output–expansion effect that benefits at most one party. Due to commitment problems, regulatory agencies with some degree of political independence are needed to implement pre–electoral agreements.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-02/cesifo1_wp2953.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2953.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2953

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Keywords: regulation; regulatory risk; political economy; electoral uncertainty; independent regulatory agency;

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References

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Citations

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Cited by:
  1. Maria Grith & Wolfgang Härdle & Juhyun Park, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers SFB649DP2009-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Carlo Cambini & Laura Rondi, 2011. "Independence, Investment and Political Interference: Evidence from the European Union," RSCAS Working Papers, European University Institute 2011/42, European University Institute.
  3. Roland Strausz, 2009. "The Political Economy of Regulatory Risk," SFB 649 Discussion Papers SFB649DP2009-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Bernardo Bortolotti & Carlo Cambini & Laura Rondi, 2011. "Regulatory Independence, Ownership and Firm Value: The Role of Political Institutions," RSCAS Working Papers, European University Institute 2011/43, European University Institute.
  5. Cambini, Carlo & Spiegel, Yossi, 2011. "Investment and capital structure of partially private regulated firms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8508, C.E.P.R. Discussion Papers.

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