Independence of Regulatory Agencies

Gábor Virág ()

No 4, Rajk László Szakkollégium Working Papers from Rajk László College

Abstract: This article analyzes the meaning and uses of regulatory independence. The starting point of the paper is the missing contractual commitment opportunity for the government which leads to underinvestment in regulated industries because investors worry about the possibility that the government will expropriate their (already sunk) investment by setting prices near to marginal cost (ratchet effect). Taking an incomplete contract we offer an institutional answer to this problem by suggesting that an independent regulatory agency that is biased toward the regulated firm can alleviate the burdens of this ratchet effect.

Keywords: Regulation; Ratchet Effect; Delegation (search for similar items in EconPapers)
JEL-codes: L51 P16 (search for similar items in EconPapers)
Pages: 13 pages
Date: 1998-10
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