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The Political Economy of Regulatory Risk

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  • Roland Strausz

Abstract

I investigate the argument that, in a two–party system with different regulatory objectives, political uncertainty generates regulatory risk. I show that this risk has a fluctuation effect that hurts both parties and an output–expansion effect that benefits one party. Consequently, at least one party dislikes regulatory risk. Moreover, both political parties gain from eliminating regulatory risk when political divergence is small or the winning probability of the regulatory–risk–averse party is not too large. Because of a commitment problem, direct political bargaining is insufficient to eliminate regulatory risk. Politically independent regulatory agencies solve this commitment problem.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-040.

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Length: 29 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2009-040

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

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References

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Citations

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Cited by:
  1. 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.
  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, 2010. "The Political Economy of Regulatory Risk," CESifo Working Paper Series 2953, CESifo Group Munich.
  4. 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.
  5. 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.

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