The Political Economy of Incentive Regulation: Theory and Evidence from US States

The determinants of incentive regulation are a key issue in industrial policy. I study an asymmetric information model of incentive rules selection by a political principal endowed with an information-gathering technology whose efficiency increases with the effort exerted by two accountable supervisors (a regulator and a judge). This set up captures the institutions of several international markets. The model predicts that reforms toward higher powered rules are more likely the more inefficient (efficient) is the production (information-gathering) technology, the less tight is political competition and the greater are pro-consumer supervisors’ incentives. This prediction is consistent with evidence based on US electric power market data.


Issue Date:
2008-04
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/36755
Total Pages:
47
JEL Codes:
D73; H11; L51; K2
Note:
Replaced with revised version of paper 10/14/08.
Series Statement:
Nota di Lavoro
34.2008




 Record created 2017-04-01, last modified 2017-08-25

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