Delegation to Independent Regulators and the Ratchet Effect
Dynamic principal-agent settings with asymmetric information but no commitment are well known to create a ratchet effect. Here, the most efficient agents must be provided with extra 'information rent' as an incentive to relinquish their informational advantage over an uninformed principal; this causes welfare to fall. We study this problem in the case of regulatory procurement and show that delegation by the government to an independent regulator whose preferences differ from the government's can overcome this inefficiency, and we provide 'conservative' conditions under which this happens. Our solution reflects several aspects of many modern regulatory settings: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across available regulators. Our results also provide an analogy with the literatures on the benefits of delegation to independent principals in other settings, such as monetary policy, financial regulation and trade and hence contribute to this broader research agenda.
|Date of creation:||Sep 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (01483) 259380
Fax: (01483) 259548
Web page: http://www.surrey.ac.uk/economics/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul Levine & Neil Rickman & Francesc Trillas, 2006. "Price Regulation and the Commitment Problem: Can Limited Capture be Beneficial?," School of Economics Discussion Papers 0106, School of Economics, University of Surrey.
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Paul Levine & John Stern & Francesc Trillas, 2005. "Utility price regulation and time inconsistency: comparisons with monetary policy," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 447-478, July.
- Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, June.
- Joanne Evans & Paul Levine & Fransesc Trillas, 2006.
"Lobbies, Delegation and the Under-investment Problem in Regulation,"
School of Economics Discussion Papers
2006, School of Economics, University of Surrey.
- Evans, Joanne & Levine, Paul & Trillas, Francesc, 2008. "Lobbies, delegation and the under-investment problem in regulation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 17-40, January.
- Besley, Timothy J. & Coate, Stephen, 2000.
"Elected Versus Appointed Regulators: Theory And Evidence,"
CEPR Discussion Papers
2381, C.E.P.R. Discussion Papers.
- Timothy Besley & Stephen Coate, 2003. "Elected Versus Appointed Regulators: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1176-1206, 09.
- Stephen Coate & Timothy Besley, 2000. "Elected versus Appointed Regulators: Theory and Evidence," NBER Working Papers 7579, National Bureau of Economic Research, Inc.
- Brown, Pamela Clark & Miller, Jeffrey B & Thornton, James R, 1994. "The Ratchet Effect and the Coordination of Production in the Absence of Rent Extraction," Economica, London School of Economics and Political Science, vol. 61(241), pages 93-114, February.
- Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-37, Autumn.
- Charles M. Kahn & João A. C. Santos, 2001.
"Allocating bank regulatory powers: lender of last resort, deposit insurance and supervision,"
BIS Working Papers
102, Bank for International Settlements.
- Kahn, Charles M. & Santos, Joao A.C., 2005. "Allocating bank regulatory powers: Lender of last resort, deposit insurance and supervision," European Economic Review, Elsevier, vol. 49(8), pages 2107-2136, November.
- Charles M. Kahn & João A.C. Santos, 2001. "Allocating bank regulatory powers: lender of last resort, deposit insurance, and supervision," Proceedings 717, Federal Reserve Bank of Chicago.
- Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
- Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
- Hans-Werner Sinn, 2002.
"The New Systems Competition,"
NBER Working Papers
8747, National Bureau of Economic Research, Inc.
- Geoff Edwards & Leonard Waverman, 2006. "The Effects of Public Ownership and Regulatory Independence on Regulatory Outcomes," Journal of Regulatory Economics, Springer, vol. 29(1), pages 23-67, 01.
- 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, June.
- Janice A. Hauge & Mark A. Jamison & James E. Prieger, 2012. "Oust the Louse: Does Political Pressure Discipline Regulators?," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 299-332, 06.
- Spulber, Daniel F & Besanko, David, 1992. "Delegation, Commitment, and the Regulatory Mandate," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(1), pages 126-54, March.
- Trillas, Francesc, 2010. "Independent regulators: Theory, evidence and reform proposals," IESE Research Papers D/860, IESE Business School.
- Carlo Cambini & Laura Rondi, 2010. "Regulatory Independence and Political Interference: Evidence from EU Mixed-Ownership Utilities’ Investment and Debt," Working Papers 2010.69, Fondazione Eni Enrico Mattei.
When requesting a correction, please mention this item's handle: RePEc:sur:surrec:0911. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alex Mandilaras)
If references are entirely missing, you can add them using this form.