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Principles of regulatory policy design

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  • Sappington, David E.M.
  • DEC

Abstract

The author contrasts command-and-control regulation (tight control of water purification, for example) with more flexible forms, including incentive regulation (such as price cap regulation), potential regulation (providing for closer scrutiny if enough customers complain), and reactive rather than proactive policies (the firm proposing actions, the regulatory saying yes or no). He contrasts informing regulation (for example, requiring that consumers be informed about ingredients in a product) and enforcing regulation (for example, prohibiting the use of certain chemicals in foods). A country's institutional structure can limit the regulators'potential for commitment, he says -- especially if regulators are limited in their ability to deliver rewards or penalties. The scope and function of regulation may also be fairly limited when technological conditions allow competition to discipline producers. Sophisticated buyers with economic power may reduce the need for regulatory control, and rapid technological change can render comprehensive command-and-control regulation ineffective or debilitating. Many forces operate simultaneously, making regulatory design a complex undertaking. Inertia is one such influence. Regulatory policies that once served an important purpose sometimes persist even though they no longer serve that purpose -- sometimes because they favor a constituency that convinces the regulator to keep the control in place. Subsidies and tariff protection often continue long past the time needed to promote the development of an infant industry, for example. When there is limited public outcry against continuing the special treatment, and the affected firms strongly urge its continuance, the regulator may be convinced to continue special treatment that no longer serves the public interest. Regulation may also be affected by the regulators'personal ambition. When regulators are"captured"by regulated firms -- diverted from the goal of protecting consumers through the promise of personal rewards for favorable treatment of the firms -- regulation may not serve society's best interest. Even if regulators are not motivated by self-interest, their ideas of what is best for society may differ from those of other government officials or of society at large. When that happens, which goals are pursued depends largely on the autonomy regulators that are granted and on the balance of power among government bodies.Regulation should be viewed in this large context to be understood fully.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1239.

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Date of creation: 31 Jan 1994
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Handle: RePEc:wbk:wbrwps:1239

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Keywords: Administrative&Regulatory Law; Environmental Economics&Policies; National Governance; Economic Theory&Research; Insurance&Risk Mitigation;

References

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  1. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 716-27, September.
  2. John Vickers & George Yarrow, 1988. "Privatization: An Economic Analysis," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262720116, December.
  3. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(2), pages 45-66, Spring.
  4. Jean-Jacques Laffont & Jean Tirole, 1988. "Repeated Auctions of Incentive Contracts, Investment, and Bidding Parity with an Application to Takeovers," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 516-537, Winter.
  5. David E.M. Sappington & David S. Sibley, 1992. "Strategic Nonlinear Pricing under Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 1-19, Spring.
  6. Nalebuff, Barry J & Stiglitz, Joseph E, 1983. "Information, Competition, and Markets," American Economic Review, American Economic Association, American Economic Association, vol. 73(2), pages 278-83, May.
  7. Bernard Caillaud & Patrick Rey & Roger Guesnerie & Jean Tirole, 1987. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 472, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn.
  9. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195115826, October.
  10. David P. Baron, 1985. "Noncooperative Regulation of a Nonlocalized Externality," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 553-568, Winter.
  11. Laura Rovizzi & David Thompson, 1992. "The regulation of product quality in the public utilities and the Citizen's Charter," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 13(3), pages 74-95, August.
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