The Political Economy of Regulatory Risk

Roland Strausz ()

No SFB649DP2009-040, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: I investigate the argument that, in a two–party system with different regulatory objectives, political uncertainty generates regulatory risk. I show that this risk has a fluctuation effect that hurts both parties and an output–expansion effect that benefits one party. Consequently, at least one party dislikes regulatory risk. Moreover, both political parties gain from eliminating regulatory risk when political divergence is small or the winning probability of the regulatory–risk–averse party is not too large. Because of a commitment problem, direct political bargaining is insufficient to eliminate regulatory risk. Politically independent regulatory agencies solve this commitment problem.

Keywords: regulation; regulatory risk; political economy; independent regulatory agency (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-mic, nep-pol and nep-reg
Date: 2009-08
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Persistent link: http://EconPapers.repec.org/RePEc:hum:wpaper:sfb649dp2009-040

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