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The Political Economy of Incentive Regulation: Theory and Evidence from US States

  • Carmine Guerriero

    (University of Cambridge)

The determinants of incentive regulation are a key issue in industrial policy. I study an asymmetric information model of incentive rules selection by a political principal endowed with an information-gathering technology whose efficiency increases with the effort exerted by two accountable supervisors (a regulator and a judge). This set up captures the institutions of several international markets. The model predicts that reforms toward higher powered rules are more likely the more inefficient (efficient) is the production (information-gathering) technology, the less tight is political competition and the greater are pro-consumer supervisors’ incentives. This prediction is consistent with evidence based on US electric power market data.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2008.34.

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Date of creation: Apr 2008
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Handle: RePEc:fem:femwpa:2008.34
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