IDEAS home Printed from https://ideas.repec.org/p/sur/surrec/0911.html
   My bibliography  Save this paper

Delegation to Independent Regulators and the Ratchet Effect

Author

Listed:
  • Joanne Evans

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

  • Neil Rickman

    (University of Surrey and CEPR)

  • Francesc Trillas

    (Universitat Autonoma de Barcelona)

Abstract

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.

Suggested Citation

  • Joanne Evans & Paul Levine & Neil Rickman & Francesc Trillas, 2011. "Delegation to Independent Regulators and the Ratchet Effect," School of Economics Discussion Papers 0911, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0911
    as

    Download full text from publisher

    File URL: https://repec.som.surrey.ac.uk/2011/DP09-11.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    2. 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.
    3. 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, September.
    4. 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, January.
    5. Spulber, Daniel F & Besanko, David, 1992. "Delegation, Commitment, and the Regulatory Mandate," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(1), pages 126-154, March.
    6. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
    7. David P. Baron, 1988. "Regulation and Legislative Choice," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 467-477, Autumn.
    8. 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.
    9. 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, December.
    10. Faure-Grimaud, Antoine & Martimort, David, 2003. "Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-437, Autumn.
    11. Trillas, Francesc, 2010. "Independent regulators: Theory, evidence and reform proposals," IESE Research Papers D/860, IESE Business School.
    12. 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.
    13. Hans‐Werner Sinn, 2004. "The New Systems Competition," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(1), pages 23-38, February.
    14. 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.
    15. 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, December.
    16. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
    17. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
    18. 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, June.
    19. 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.
    20. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Raffaele Fiocco & Roland Strausz, 2015. "Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 550-569, September.
    2. Lehr, William & Sicker, Douglas, 2017. "Communications Act 2021," 28th European Regional ITS Conference, Passau 2017 169478, International Telecommunications Society (ITS).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonio Estache & Liam Wren-Lewis, 2009. "Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 729-770, September.
    2. Francesc Trillas Jané, 2016. "Behavioral Regulatory Agencies," Working Papers wpdea1606, Department of Applied Economics at Universitat Autonoma of Barcelona.
    3. 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.
    4. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    5. Brito Duarte & Pereira Pedro & Vareda João, 2013. "Investment, Dynamic Consistency and the Sectoral Regulator’s Objective," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 563-594, August.
    6. Raffaele Fiocco & Roland Strausz, 2015. "Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 550-569, September.
    7. Antonio Estache & Liam Wren-Lewis, 2010. "What Anti-Corruption Policy Can Learn from Theories of Sector Regulation," Working Papers ECARES ECARES 2010-033, ULB -- Universite Libre de Bruxelles.
    8. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
    9. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
    10. Levine, Paul & Rickman, Neil, 2002. "Price Regulation, Investment and the Commitment Problem," CEPR Discussion Papers 3200, C.E.P.R. Discussion Papers.
    11. Tapas Kundu & Tore Nilssen, 2020. "Delegation of Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 68(3), pages 445-482, September.
    12. David Martimort & Jérôme Pouyet & Carine Staropoli, 2020. "Use and abuse of regulated prices in electricity markets: “How to regulate regulated prices?”," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(3), pages 605-634, July.
    13. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2010. "The renegotiation cost of public transport services contracts," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00622961, HAL.
    14. Antonio Estache & Liam Wren-Lewis, 2011. "Anti-Corruption Policy in Theories of Sector Regulation," Chapters, in: Susan Rose-Ackerman & Tina Søreide (ed.), International Handbook on the Economics of Corruption, Volume Two, chapter 9, Edward Elgar Publishing.
    15. repec:hal:pseose:hal-00710639 is not listed on IDEAS
    16. Currie, David & Levine, Paul L & Rickman, Neil, 1999. "Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?," CEPR Discussion Papers 2274, C.E.P.R. Discussion Papers.
    17. Lehr, William & Sicker, Douglas, 2017. "Communications Act 2021," 28th European Regional ITS Conference, Passau 2017 169478, International Telecommunications Society (ITS).
    18. Boggio, Margherita, 2011. "Municipal capitalism, regulatory federalism and politics," MPRA Paper 46244, University Library of Munich, Germany.
    19. Iossa, Elisabetta & Martimort, David, 2016. "Corruption in PPPs, incentives and contract incompleteness," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 85-100.
    20. Spiller, Pablo T., 2013. "Transaction cost regulation," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 232-242.
    21. Frisell, Lars & Roszbach, Kasper & spagnolo, giancarlo, 2008. "Governing the Governors: A Clinical Study of Central Banks," Working Paper Series 221, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    delegation; ratchet effect; procurement;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sur:surrec:0911. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ioannis Lazopoulos (email available below). General contact details of provider: https://edirc.repec.org/data/desuruk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.