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The political economy of regulatory risk

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  • Strausz, Roland

Abstract

I investigate the argument that, in a twoparty system with different regulatory objectives, political uncertainty generates regulatory risk. I show that this risk has a fluctuation effect that hurts both parties and an outputexpansion effect that benefits one party. Consequently, at least one party dislikes regulatory risk. Moreover, both political parties gain from eliminating regulatory risk when political divergence is small or the winning probability of the regulatoryriskaverse party is not too large. Because of a commitment problem, direct political bargaining is insufficient to eliminate regulatory risk. Politically independent regulatory agencies solve this commitment problem.

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  • Strausz, Roland, 2009. "The political economy of regulatory risk," SFB 649 Discussion Papers 2009-040, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2009-040
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    JEL classification:

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

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