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Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?

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  • Currie, David
  • Levine, Paul L
  • Rickman, Neil

Abstract

Delegation to independent bodies whose preference can be different from those of the government has been shown to have beneficial commitment benefits in areas as widely diverse as monetary policy and trade. This paper addresses the case for delegation in the context of a cost-reimbursement procurement problem. Our solution combines several features of the modern regulatory environment: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across regulators available. We find that delegation to an independent industry regulator, whose preferences are more pro-rent than those of the government, can raise welfare by mitigating the ratchet effect.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2274.

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Date of creation: Oct 1999
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Handle: RePEc:cpr:ceprdp:2274

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Keywords: Delegation; Procurement; Ratchet Effect;

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References

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  1. Armstrong, M., 1994. "Delegation and discretion," Discussion Paper Series In Economics And Econometrics 9421, Economics Division, School of Social Sciences, University of Southampton.
  2. Yao, Dennis A., 1988. "Strategic responses to automobile emissions control: A game-theoretic analysis," Journal of Environmental Economics and Management, Elsevier, vol. 15(4), pages 419-438, December.
  3. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, vol. 87(5), pages 911-20, December.
  5. Dillen, M. & Lundholm, M., 1992. "Dynamic Income Taxation, Redistribution, and the Ratchet Effect," Papers 1992-3, Uppsala - Working Paper Series.
  6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  7. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  8. Konrad, Kai A. & Torsvik, Gaute, 1997. "Dynamic incentives and term limits in bureaucracy regulation," European Journal of Political Economy, Elsevier, vol. 13(2), pages 261-279, May.
  9. Nahum Melamad & Dilip Mookherjee & Stefan Reichelstein, 1996. "Contract Complexity, Incentives and the Value of Delegation," Papers 0070, Boston University - Industry Studies Programme.
  10. David Collie, 1997. "Delegation and Strategic Trade Policy," International Economic Journal, Taylor & Francis Journals, vol. 11(3), pages 35-46.
  11. Barry W. Ickes & Larry Samuelson, 1987. "Job Transfers and Incentives in Complex Organizations: Thwarting the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 275-286, Summer.
  12. Dalen, Dag Morten, 1995. "Efficiency-improving investment and the ratchet effect," European Economic Review, Elsevier, vol. 39(8), pages 1511-1522, October.
  13. John M. Litwack, 1993. "Coordination, Incentives, and the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 271-285, Summer.
  14. Dalen, Dag Morten, 1997. "Regulation of Quality and the Ratchet Effect: Does Unverifiability Hurt the Regulator?," Journal of Regulatory Economics, Springer, vol. 11(2), pages 139-55, March.
  15. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  16. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  17. Currie, David & Levine, Paul & Pearlman, Joseph, 1996. "The Choice of 'Conservative' Bankers in Open Economies: Monetary Regime Options for Europe," Economic Journal, Royal Economic Society, vol. 106(435), pages 345-58, March.
  18. Brown, Pamela Clark & Miller, Jeffrey B & Thornton, James R, 1994. "The Ratchet Effect and the Coordination of Production in the Absence of Rent Extraction," Economica, London School of Economics and Political Science, vol. 61(241), pages 93-114, February.
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Cited by:
  1. Paul Levine & Paul Levine & Jon Stern & Francesc Trillas, 2003. "Independent Utility Regulators: Lessons from Monetary Policy," School of Economics Discussion Papers 0403, School of Economics, University of Surrey.
  2. Stern, Jon & Trillas, Francesc, 2003. "Independence and discretion in telecommunications regulation: lessons from independent central banks," Utilities Policy, Elsevier, vol. 11(4), pages 191-201, December.
  3. Paul Levine & Neil Rickman, 2003. "Price Regulation, Investment and the Commitment Problem," School of Economics Discussion Papers 0603, School of Economics, University of Surrey.

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