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Regulatory behaviour under threat of court reversal

Listed author(s):
  • Magnus Söderberg

    ()

    (CERNA i3 - Centre d'économie industrielle i3 - MINES ParisTech - École nationale supérieure des mines de Paris - CNRS - Centre National de la Recherche Scientifique - PSL - PSL Research University)

  • Flavio Menezes

    (School of Economics - The University of Queensland [Brisbane])

  • Miguel Santolino

    (Department of Econometrics - University of Barcelona)

We investigate how public bureaucrats influence outcomes in regulated markets when they resolve price disputes. It has previously been demonstrated that regulators cause biased outcomes when they have short office terms, i.e. when they have relatively strong career concerns (Leaver, 2009). This paper extends previous studies to the situation when bureaucrats have life tenure and therefore have relatively weaker career concerns. We posit that potential career concerns are negatively related to experience in that experienced regulators develop stronger concerns for consumers. This suggests that the regulator's motivation matter for regulatory decisions but that motivation might change as regulators become more experienced. We also posit that regulators' behaviour is influenced by case complexity, which affects how much effort that have to put in towards a regulatory decision. Our theoretical model predicts that regulators set lower prices when cases are less complex and that those prices are confirmed when appealed to the court. For more complex cases, the court reduces the regulator's price when she is only concerned about her career and the court increases the regulator's price when she cares about both her career and consumer surplus. All these predictions are confirmed empirically when using data on 489 disputes from the Swedish electricity market.

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Paper provided by HAL in its series Working Papers with number hal-00874878.

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Date of creation: 17 Oct 2013
Handle: RePEc:hal:wpaper:hal-00874878
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  1. Shleifer, Andrei, 2012. "The Failure of Judges and the Rise of Regulators," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016958.
  2. Magnus Söderberg, 2008. "Uncertainty and regulatory outcome in the Swedish electricity distribution sector," Post-Print hal-00869800, HAL.
  3. Canice Prendergast, 2003. "The Limits of Bureaucratic Efficiency," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 929-958, October.
  4. Russell Smyth & Magnus Söderberg, 2010. "Public interest versus regulatory capture in the Swedish electricity market," Journal of Regulatory Economics, Springer, vol. 38(3), pages 292-312, December.
  5. Steven Shavell, 2006. "The Appeals Process and Adjudicator Incentives," The Journal of Legal Studies, University of Chicago Press, vol. 35(1), pages 1-29, 01.
  6. Flavio Menezes & Christian Roessler, 2008. "Good and Bad Consistency in Regulatory Decisions," Discussion Papers Series 376, School of Economics, University of Queensland, Australia.
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  10. Fon, Vincy & Parisi, Francesco, 2006. "Judicial precedents in civil law systems: A dynamic analysis," International Review of Law and Economics, Elsevier, vol. 26(4), pages 519-535, December.
  11. Clare Leaver, 2009. "Bureaucratic Minimal Squawk Behavior: Theory and Evidence from Regulatory Agencies," American Economic Review, American Economic Association, vol. 99(3), pages 572-607, June.
  12. Shavell, Steven, 1995. "The Appeals Process as a Means of Error Correction," The Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 379-426, June.
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  19. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 1-56, January.
  20. Lucas W. Davis & Erich Muehlegger, 2010. "Do Americans consume too little natural gas? An empirical test of marginal cost pricing," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 791-810.
  21. Robert Breunig & Jeremy Hornby & Scott Stacey & Flavio Menezes, 2006. "Price Regulation in Australia: How Consistent Has It Been?," The Economic Record, The Economic Society of Australia, vol. 82(256), pages 67-76, 03.
  22. Robert Breunig & Flavio M. Menezes, 2008. "Testing Regulatory Consistency," Discussion Papers Series 380, School of Economics, University of Queensland, Australia.
  23. Canice Prendergast, 2007. "The Motivation and Bias of Bureaucrats," American Economic Review, American Economic Association, vol. 97(1), pages 180-196, March.
  24. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743.
  25. Daughety, Andrew F & Reinganum, Jennifer F, 1999. "Stampede to Judgment: Persuasive Influence and Herding Behavior by Courts," American Law and Economics Review, Oxford University Press, vol. 1(1-2), pages 158-189, Fall.
  26. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
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  28. Ludivine Garside & Paul A. Grout & Anna Zalewska, 2013. "Does Experience Make You ‘Tougher’? Evidence From Competition Law," Economic Journal, Royal Economic Society, vol. 0, pages 474-490, 05.
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