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The Political Economy of Regulatory Risk

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  • Roland Strausz

Abstract

This paper investigates political uncertainty as a source of regulatory risk. It shows that political parties have incentives to reduce regulatory risk actively: Mutually beneficial pre–electoral agreements that reduce regulatory risk always exist. Agreements that fully eliminate it exist when political divergence is small or electoral uncertainty is appropriately skewed. These results follow from a fluctuation effect of regulatory risk that hurts parties and an output–expansion effect that benefits at most one party. Due to commitment problems, regulatory agencies with some degree of political independence are needed to implement pre–electoral agreements.

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  • Roland Strausz, 2010. "The Political Economy of Regulatory Risk," CESifo Working Paper Series 2953, CESifo.
  • Handle: RePEc:ces:ceswps:_2953
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    1. Roland Strausz, 2009. "The Political Economy of Regulatory Risk," SFB 649 Discussion Papers SFB649DP2009-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Bortolotti, Bernardo & Cambini, Carlo & Rondi, Laura, 2013. "Reluctant regulation," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 804-828.
    3. Bernardo Bortolotti & Carlo Cambini & Laura Rondi, 2011. "Regulatory Independence, Ownership and Firm Value: The Role of Political Institutions," RSCAS Working Papers 2011/43, European University Institute.
    4. Spiegel, Yossi & Cambini, Carlo, 2011. "Investment and capital structure of partially private regulated firms," CEPR Discussion Papers 8508, C.E.P.R. Discussion Papers.
    5. Carlo Cambini & Laura Rondi, 2011. "Independence, Investment and Political Interference: Evidence from the European Union," RSCAS Working Papers 2011/42, European University Institute.
    6. Maria Grith & Wolfgang Härdle & Juhyun Park, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers SFB649DP2009-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    7. Steffen Brunner & Christian Flachsland & Robert Marschinski, 2012. "Credible commitment in carbon policy," Climate Policy, Taylor & Francis Journals, vol. 12(2), pages 255-271, March.

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    More about this item

    Keywords

    regulation; regulatory risk; political economy; electoral uncertainty; independent regulatory agency;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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