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Politics, institutions, and outcomes: Electricity regulation in Argentina and Chile


  • William B. Heller
  • Mathew D. McCubbins


Risk, whether market or political, is an important determinant of private investment decisions. One important risk, subject to control by the government, is the risk associated with the hold-up problem: governments can force utilities to shoulder burdensome taxes, to use input factors ineffectively, or to charge unprofitable rates for their service. To attract private investment governments must be able to make commitments to policies that are nonexpropriative (either to contracts that guarantee very high rates of return or to favorable regulatory policies). These commitments, of course, must be credible. Judgments about the credibility of commitments to regulatoty policies are based upon two political factors: regulatory predictability and regime stability. Regulatory predictability implies that the regulatory process, in which prices and levels of service are set, is not arbitrary. If the condition of regulatory predictability holds, then investors can forecast their returns over time and hence can calculate the value of their investment. If there is regime stability, then there is minimal risk of wholesale changes in the way the government regulates the industry—the most extreme type of change being the denial of property rights, or expropriation. We argue that three characteristics of the regulatory process are, in turn, important determinants of regulatory predictability: agenda control, reversionary regulatory policy, and veto gates. Moreover, regime stability is also, in part, a function of these three characteristics. We examine our theory of political risk and regulatoty commitment by comparing the cases of Argentine and Chilean electricity investment and regulation.

Suggested Citation

  • William B. Heller & Mathew D. McCubbins, 1996. "Politics, institutions, and outcomes: Electricity regulation in Argentina and Chile," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(4), pages 357-387.
  • Handle: RePEc:taf:jpolrf:v:1:y:1996:i:4:p:357-387 DOI: 10.1080/13841289608523368

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    Cited by:

    1. Taliercio, Robert Jr., 2004. "Administrative Reform as Credible Commitment: The Impact of Autonomy on Revenue Authority Performance in Latin America," World Development, Elsevier, vol. 32(2), pages 213-232, February.
    2. M. Pollitt, 2004. "Electricity reform in Chile. Lessons for developing countries," Competition and Regulation in Network Industries, Intersentia, vol. 5(3), pages 221-263, September.
    3. Witold J. Henisz & Bennet A. Zelner & Mauro F. Guillen, 2004. "International Coercion, Emulation and Policy Diffusion: Market-Oriented Infrastructure Reforms, 1977-1999," William Davidson Institute Working Papers Series 2004-713, William Davidson Institute at the University of Michigan.
    4. 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.
    5. Recuero Virto, Laura & Gasmi, Farid & Noumba Um, Paul, 2010. "Does political accountability matter for infrastructure regulation? The case of telecommunications," MPRA Paper 28496, University Library of Munich, Germany, revised 2010.
    6. Pollitt, Michael, 2008. "Electricity reform in Argentina: Lessons for developing countries," Energy Economics, Elsevier, vol. 30(4), pages 1536-1567, July.
    7. Farid Gasmi & Paul Noumba Um & Laura Recuero Virto, 2009. "Political Accountability and Regulatory Performance in Infrastructure Industries: An Empirical Analysis," World Bank Economic Review, World Bank Group, vol. 23(3), pages 509-531, October.
    8. Russell Pittman, 2001. "Vertical Restructuring of the Infrastructure Sectors of Transition Economies," Industrial Organization 0111002, EconWPA.


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