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Regulation and Legislative Choice

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  • David P. Baron

Abstract

Regulation has economic and political dimensions, both of which I endogenize in this hierarchical model in which a legislature chooses by majority rule the mandate of an agency that faithfully regulates a firm with private information about its costs. Sufficient conditions are given for an equilibrium to exist. If there is a strong electoral connection between the benefits delivered to constituents and their electoral support, the legislature will choose a regulatory mandate that favors consumer over producer interests and results in regulation that does not maximize expected total surplus. Political interest in delivering benefits to constituents through factor employment results in a regulatory mandate that yields greater expected total surplus.

Suggested Citation

  • David P. Baron, 1988. "Regulation and Legislative Choice," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 467-477, Autumn.
  • Handle: RePEc:rje:randje:v:19:y:1988:i:autumn:p:467-477
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    Cited by:

    1. Raffaele Fiocco & Roland Strausz, 2015. "Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 550-569, September.
    2. Timothy Besley & Stephen Coate, 2003. "Elected Versus Appointed Regulators: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1176-1206, September.
    3. Galal, Ahmed & Nauriyal, Bharat, 1995. "Regulating telecommunications in developing countries : outcomes, incentives, and commitment," Policy Research Working Paper Series 1520, The World Bank.
    4. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
    5. Strausz, Roland, 2017. "Politically induced regulatory risk and independent regulatory agencies," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 215-238.
    6. repec:kap:revind:v:52:y:2018:i:3:d:10.1007_s11151-017-9582-z is not listed on IDEAS
    7. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 3851, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    8. Alberto Alesina & Andrea Passalacqua, 2015. "The Political Economy of Government Debt," NBER Working Papers 21821, National Bureau of Economic Research, Inc.
    9. Tomaso Duso, 2002. "On the Politics of the Regulatory Reform: Econometric Evidence from the OECD Countries," CIG Working Papers FS IV 02-07, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    10. Brian Mittendorf & Jiwoong Shin & Dae-Hee Yoon, 2013. "Manufacturer marketing initiatives and retailer information sharing," Quantitative Marketing and Economics (QME), Springer, vol. 11(2), pages 263-287, June.
    11. Enikolopov, Ruben, 2014. "Politicians, bureaucrats and targeted redistribution," Journal of Public Economics, Elsevier, vol. 120(C), pages 74-83.
    12. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    13. Saha, Souresh, 2014. "Firm's objective function and product and process R&D," Economic Modelling, Elsevier, vol. 36(C), pages 484-494.
    14. Julien Daubanes & Jean-Charles Rochet, 2013. "Activists versus Captured Regulators," CESifo Working Paper Series 4444, CESifo Group Munich.
    15. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    16. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.

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