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Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation

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  • Raffaele Fiocco
  • Roland Strausz

Abstract

Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short term contracting. A consumer standard alleviates the regulator’s myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find cost exaggeration less attractive. This reduces the need for long term rents and mitigates ratchet effects. The regulator’s welfare standard biased towards consumers comes, however, at the cost of some allocative distortion from the genuine social welfare perspective. Hence, a trade-off results which favors strategic delegation when efficient firms are relatively likely.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2012-055.

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Length: 28 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2012-055

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Keywords: Dynamic regulation; strategic delegation; consumer standard; ratchet effect; limited commitment.;

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