Working Paper: CEPR ID: DP2274
Authors: David Currie; Paul Levine; Neil Rickman
Abstract: Delegation to independent bodies whose preference can be different from those of the government has been shown to have beneficial commitment benefits in areas as widely diverse as monetary policy and trade. This paper addresses the case for delegation in the context of a cost-reimbursement procurement problem. Our solution combines several features of the modern regulatory environment: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across regulators available. We find that delegation to an independent industry regulator, whose preferences are more pro-rent than those of the government, can raise welfare by mitigating the ratchet effect.
Keywords: delegation; ratchet effect; procurement
JEL Codes: L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Delegation to a pro-industry regulator (L51) | Raise welfare (I38) |
| Mitigating the ratchet effect (D15) | Raise welfare (I38) |
| Lowering the first-period rent for efficient firms (R38) | Increase first-period welfare (D69) |
| First-period welfare sufficient to offset second-period costs from higher rents (H53) | Raise welfare (I38) |
| Sufficiently pro-industry regulator (L51) | Induce a separating equilibrium (D51) |
| Inducing a separating equilibrium (D51) | Raise intertemporal welfare (D15) |
| Excessively pro-industry regulators (L51) | Reduce welfare (I38) |