The Subsidiarity Bias in Regulation

Jean-Jacques Laffont and Jerome Pouyet

No 1, series from Dipartimento di Scienze Economiche - Università di Bari

Abstract: We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two oppos- ite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, be- cause the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm's rent and contracts tend to be too low-powered. When the activities of the firm are suf- ficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulat- ory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.

Keywords: incentives; decentralization; regulation (search for similar items in EconPapers)
JEL-codes: D72 H41 H70 L20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic, nep-pbe and nep-reg
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Related works:
Working Paper: The Subsidiarity Bias in Regulation (2000)
Journal Article: The subsidiarity bias in regulation (2004)
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