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How much discretion for risk regulators?

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  • Yolande Hiriart
  • David Martimort

Abstract

We analyze the regulation of firms that undertake socially risky activities but can reduce the probability of an accident inflicted on third parties by carrying out non verifiable effort. Congress delegates regulation to an agency, although these two bodies may have different preferences toward the industry. The optimal level of discretion left to the agency results from the following trade-off: the agency can tailor discretionary policies to its expert knowledge about potential harm, but it implements policies that are too "pro-industry." The agency should be given full discretion when the firm is solvent; partial discretion is preferred otherwise. We then investigate how this trade-off changes as the political and economic landscapes are modified.
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Suggested Citation

  • Yolande Hiriart & David Martimort, 2012. "How much discretion for risk regulators?," RAND Journal of Economics, RAND Corporation, vol. 43(2), pages 283-314, June.
    • Handle: RePEc:bla:randje:v:43:y:2012:i:2:p:283-314
    DOI: j.1756-2171.2012.00166.x
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    File URL: http://hdl.handle.net/10.1111/j.1756-2171.2012.00166.x
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    Cited by:

    1. Tapas Kundu & Tore Nilssen, 2020. "Delegation of Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 68(3), pages 445-482, September.
    2. Alessandro De Chiara & Marco A. Schwarz, 2020. "A Dynamic Theory of Regulatory Capture," Working Papers 2020-12, Faculty of Economics and Statistics, Universität Innsbruck.
    3. 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.
    4. Fahad Khalil & Doyoung Kim & Jacques Lawarrée, 2013. "Contracts offered by bureaucrats," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 686-711, December.
    5. Julien Daubanes & Jean-Charles Rochet, 2019. "The Rise of NGO Activism," American Economic Journal: Economic Policy, American Economic Association, vol. 11(4), pages 183-212, November.
    6. Neven, Damien & Piccolo, Salvatore & Andreu, Enrique, 2021. "Price Authority and Information Sharing with Competing Principals," CEPR Discussion Papers 16753, C.E.P.R. Discussion Papers.
    7. Iossa, Elisabetta & Martimort, David, 2016. "Corruption in PPPs, incentives and contract incompleteness," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 85-100.
    8. Zambrano, Juan Carlos & Astaiza-Gómez, José Gabriel & García, Juan David, 2021. "Un Modelo Principal-Agente Dinámico de Reducción de Perdidas de Energía Electrica en Tiempo Continuo [A Dynamic Principal-Agent Model of Electric Power Loss Reduction in Continuous Time]," MPRA Paper 110143, University Library of Munich, Germany.
    9. Per J. Agrell & Axel Gautier, 2017. "A Theory of Soft Capture," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(3), pages 571-596, July.
    10. Julien Xavier Daubanes, 2017. "The Sustainable Management of a Productive Natural Capital," IFRO Working Paper 2017/08, University of Copenhagen, Department of Food and Resource Economics.
    11. Estache, Antonio & Wren-Lewis, Liam, 2010. "What Anti-Corruption Policy Can Learn from Theories of Sector Regulation," CEPR Discussion Papers 8082, C.E.P.R. Discussion Papers.
    12. Kim, Doyoung, 2013. "Delegation of information verification," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 488-500.
    13. Groll, Thomas & O’Halloran, Sharyn & McAllister, Geraldine, 2021. "Delegation and the regulation of U.S. financial markets," European Journal of Political Economy, Elsevier, vol. 70(C).
    14. François DESTANDAU & Anne ROZAN & Sandrine SPAETER, 2014. "Supra-Regional vs. Regional Regulators in the Water Pollution Mitigation: Optimal Exemption Policies," Working Papers of BETA 2014-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    15. Daiki Kishishita & Susumu Sato, 2021. "Optimal risk regulation of monopolists with subjective risk assessment," Journal of Regulatory Economics, Springer, vol. 59(3), pages 251-279, June.
    16. repec:bri:cmpowp:13/325 is not listed on IDEAS
    17. Julien Daubanes & Jean-Charles Rochet, 2013. "Activists versus Captured Regulators," CESifo Working Paper Series 4444, CESifo.

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