Delegation to Independent Regulators and the Ratchet Effect
AbstractDynamic principal-agent settings with asymmetric information but no commitment are well known to create a ratchet effect. Here, the most efficient agents must be provided with extra 'information rent' as an incentive to relinquish their informational advantage over an uninformed principal; this causes welfare to fall. We study this problem in the case of regulatory procurement and show that delegation by the government to an independent regulator whose preferences differ from the government's can overcome this inefficiency, and we provide 'conservative' conditions under which this happens. Our solution reflects several aspects of many modern regulatory settings: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across available regulators. Our results also provide an analogy with the literatures on the benefits of delegation to independent principals in other settings, such as monetary policy, financial regulation and trade and hence contribute to this broader research agenda.
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Bibliographic InfoPaper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0911.
Length: 43 pages
Date of creation: Sep 2011
Date of revision:
delegation; ratchet effect; procurement;
Find related papers by JEL classification:
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-22 (All new papers)
- NEP-CTA-2011-09-22 (Contract Theory & Applications)
- NEP-IND-2011-09-22 (Industrial Organization)
- NEP-MIC-2011-09-22 (Microeconomics)
- NEP-REG-2011-09-22 (Regulation)
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