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Independence of Regulatory Agencies

Author

Listed:
  • Gábor Virág

    (Princeton University, Dept. of Econ.)

Abstract

This article analyzes the meaning and uses of regulatory independence. The starting point of the paper is the missing contractual commitment opportunity for the government which leads to underinvestment in regulated industries because investors worry about the possibility that the government will expropriate their (already sunk) investment by setting prices near to marginal cost (ratchet effect). Taking an incomplete contract we offer an institutional answer to this problem by suggesting that an independent regulatory agency that is biased toward the regulated firm can alleviate the burdens of this ratchet effect.

Suggested Citation

  • Gábor Virág, 1998. "Independence of Regulatory Agencies," Rajk László Szakkollégium Working Papers 4, Rajk László College.
    • Handle: RePEc:rlc:rlszwp:4
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    File URL: http://papers.rajk.bke.hu/doksik/wp/wp04.pdf
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    More about this item

    Keywords

    Regulation; Ratchet Effect; Delegation;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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