Regulatory behaviour under threat of court reversal

Magnus Söderberg, Flavio Menezes and Miguel Santolino
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Miguel Santolino: Department of Econometrics - UB - Universitat de Barcelona

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Abstract: We investigate how public bureaucrats influence outcomes in regulated markets when they resolve price disputes. It has previously been demonstrated that regulators cause biased outcomes when they have short office terms, i.e. when they have relatively strong career concerns (Leaver, 2009). This paper extends previous studies to the situation when bureaucrats have life tenure and therefore have relatively weaker career concerns. We posit that potential career concerns are negatively related to experience in that experienced regulators develop stronger concerns for consumers. This suggests that the regulator's motivation matter for regulatory decisions but that motivation might change as regulators become more experienced. We also posit that regulators' behaviour is influenced by case complexity, which affects how much effort that have to put in towards a regulatory decision. Our theoretical model predicts that regulators set lower prices when cases are less complex and that those prices are confirmed when appealed to the court. For more complex cases, the court reduces the regulator's price when she is only concerned about her career and the court increases the regulator's price when she cares about both her career and consumer surplus. All these predictions are confirmed empirically when using data on 489 disputes from the Swedish electricity market.

Keywords: regulation; effort; complexity; experience (search for similar items in EconPapers)
Date: 2013-10-17
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Working Paper: Regulatory behaviour under threat of court reversal (2012)
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