Delegation to Independent Regulators and the Ratchet Effect

Joanne Evans, Paul Levine (), Neil Rickman and Francesc Trillas

No 911, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Dynamic principal-agent settings with asymmetric information but no commitment are well known to create a ratchet effect. Here, the most efficient agents must be provided with extra 'information rent' as an incentive to relinquish their informational advantage over an uninformed principal; this causes welfare to fall. We study this problem in the case of regulatory procurement and show that delegation by the government to an independent regulator whose preferences differ from the government's can overcome this inefficiency, and we provide 'conservative' conditions under which this happens. Our solution reflects several aspects of many modern regulatory settings: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across available regulators. Our results also provide an analogy with the literatures on the benefits of delegation to independent principals in other settings, such as monetary policy, financial regulation and trade and hence contribute to this broader research agenda.

Keywords: delegation; ratchet effect; procurement (search for similar items in EconPapers)
JEL-codes: L51 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2011-09
New Economics Papers: this item is included in nep-cta, nep-ind, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0911

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