Working Paper: CEPR ID: DP9928
Authors: Raffaele Fiocco; Roland Strausz
Abstract: Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short term contracting. A pure consumer standard alleviates the regulator's myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find it less attractive to exaggerate costs. This reduces the need for long term rents and mitigates ratchet effects. A welfare standard biased towards consumers entails, however, allocative costs arising from partial separation of the firms' cost types. A trade-off results which favors strategic delegation when efficient firms are relatively likely.
Keywords: Consumer standard; Dynamic regulation; Limited commitment; Ratchet effects; Strategic delegation
JEL Codes: D82; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulator with a lower profit weight (pure consumer standard) (D11) | reduces the temptation to raise output after learning the firm is inefficient (D22) |
| reduces the temptation to raise output after learning the firm is inefficient (D22) | decrease in the expected rents for the efficient firm (D21) |
| efficient firms find it less attractive to exaggerate costs (D22) | anticipated tougher regulatory behavior (G18) |
| regulatory profit weight (K20) | regulator's behavior (G18) |
| regulator's behavior (G18) | efficiency of the regulatory contracts (L14) |