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The Subsidiarity Bias in Regulation

Author

Listed:
  • Jean-Jacques Laffont

    (IDEI and GREMAQ)

  • Jérome Pouyet

    (CERAS-ENPC)

Abstract

We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two oppos- ite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, be- cause the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm's rent and contracts tend to be too low-powered. When the activities of the firm are suf- ficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulat- ory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.

Suggested Citation

  • Jean-Jacques Laffont & Jérome Pouyet, 2000. "The Subsidiarity Bias in Regulation," SERIES 0001, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Jun 2000.
    • Handle: RePEc:bai:series:economia-series1
    as

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    as
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    More about this item

    Keywords

    incentives; decentralization; regulation.;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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