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The subsidiarity bias in regulation

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  • Laffont, Jean-Jacques
  • Pouyet, Jerome

Abstract

We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two oppos- ite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, be- cause the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm's rent and contracts tend to be too low-powered. When the activities of the firm are suf- ficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulat- ory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Laffont, Jean-Jacques & Pouyet, Jerome, 2004. "The subsidiarity bias in regulation," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 255-283, January.
  • Handle: RePEc:eee:pubeco:v:88:y:2004:i:1-2:p:255-283
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    Cited by:

    1. Felgenhauer, Mike & Grüner, Hans Peter, 2007. "Safety Nets Within Banks," CEPR Discussion Papers 6317, C.E.P.R. Discussion Papers.
    2. Andrea Attar & Thomas Mariotti & François Salanié, 2011. "Nonexclusive Competition in the Market for Lemons," Econometrica, Econometric Society, vol. 79(6), pages 1869-1918, November.
    3. Boggio, Margherita, 2011. "From Reluctant Privatization to Municipal Capitalism: an Overview on Ownership, Political Connections and Decentralization," MPRA Paper 46232, University Library of Munich, Germany.
    4. André De Palma & Luc Leruth & Adnan Mazarei, 2010. "Regulating sovereign wealth funds operating overseas through an external fund manager," Working Papers hal-00488662, HAL.
    5. Jean-Jacques Laffont, 2004. "Management of Public Utilities in China," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 185-210, November.
    6. Khaled Diaw & Jérôme Pouyet, 2004. "Competition, Incomplete Discrimination and Versioning," Working Papers 2004-20, Center for Research in Economics and Statistics.
    7. Montolio, Daniel & Trillas, Francesc, 2013. "Regulatory federalism and industrial policy in broadband telecommunications," Information Economics and Policy, Elsevier, vol. 25(1), pages 18-31.
    8. Trillas, Francesc, 2010. "Network industries and regulatory jurisdiction," IESE Research Papers D/859, IESE Business School.
    9. Olsen, Trond E. & Osmundsen, Petter, 2011. "Multinationals, tax competition and outside options," Journal of Public Economics, Elsevier, vol. 95(11), pages 1579-1588.
    10. Estache, Antonio & Wren-Lewis, Liam, 2010. "What Anti-Corruption Policy Can Learn from Theories of Sector Regulation," CEPR Discussion Papers 8082, C.E.P.R. Discussion Papers.
    11. Trillas, Francesc, 2010. "Electricity and telecoms reforms in the EU: Insights from the economics of federalism," Utilities Policy, Elsevier, vol. 18(2), pages 66-76, June.
    12. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.
    13. Emmanuelle Auriol & Antonio Estache & Liam Wren-Lewis, 2017. "Can Supranational Infrastructure Regulation Compensate for National Institutional Weaknesses ?," Working Papers ECARES ECARES 2017-11, ULB -- Universite Libre de Bruxelles.
    14. Juan Luis Jiménez & Javier Campos, 2004. "Efectos de la descentralización de la política de defensa de la competencia," Documentos de trabajo conjunto ULL-ULPGC 2004-09, Facultad de Ciencias Económicas de la ULPGC.
    15. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
    16. Antonio Estache & Liam Wren-Lewis, 2012. "Supranational Infrastructure Regulation: Institutional Opportunities and Challenges," Working Papers ECARES ECARES 2012-025, ULB -- Universite Libre de Bruxelles.
    17. Wren-Lewis, Liam, 2013. "Commitment in utility regulation: A model of reputation and policy applications," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 210-231.
    18. Andrea Attar & Eloisa Campioni & Gwenael Piaser, 2011. "Information Revelation in Competing Mechanism Games," CEIS Research Paper 205, Tor Vergata University, CEIS, revised 04 Jul 2011.
    19. Antonio Estache & Liam Wren-Lewis, 2011. "Anti-Corruption Policy in Theories of Sector Regulation," Chapters,in: International Handbook on the Economics of Corruption, Volume Two, chapter 9 Edward Elgar Publishing.
    20. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2013. "Two-sided communication in competing mechanism games," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 62-70.
    21. Laffont, Jean-Jacques & Meleu, Mathieu, 2001. "Separation of powers and development," Journal of Development Economics, Elsevier, vol. 64(1), pages 129-145, February.

    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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