Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation

Raffaele Fiocco and Roland Strausz

Journal of Economics & Management Strategy, 2015, vol. 24, issue 3, 550-569

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 toward 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.

Date: 2015
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Citations: View citations in EconPapers (7)

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https://doi.org/10.1111/jems.12104

Related works:
Working Paper: Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation (2014)
Working Paper: Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation (2014)
Working Paper: Consumer standards as a strategic device to mitigate ratchet effects in dynamic regulation (2012)
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