Bureaucratic Minimal Squawk: Theory and Evidence
Regulators appointed on finite contracts have an incentive to signal their worth to the job market. This paper shows that, if contracts are sufficiently short, this can result in "minimal squawk" behaviour. Regulated firms publicise the quality of unfavourable decisions, aware that regulators then set favourable policies more often to keep their professional reputation intact. Terms of office vary across US states, prompting an empirical test using firm-level data from the regulation of the US electric industry. Consistent with the theory, we find that shorter terms are associated with fewer rate of return reviews and higher residential prices.
|Date of creation:||29 Aug 2002|
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