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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

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    File URL: https://repec.som.surrey.ac.uk/2011/DP09-11.pdf
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    References listed on IDEAS

    as
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    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.
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    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, April.
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    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)

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    Cited by:

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    2. 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.

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    More about this item

    Keywords

    delegation; ratchet effect; procurement;
    All these keywords.

    JEL classification:

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

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