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

Roland Strausz and Raffaele Fiocco

No 9928, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D82 L51 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-mic and nep-reg
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation (2015)
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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