The politics of government decision making :
regulatory institutions
Author(s)
Laffont, Jean-Jacques
Tirole, Jean
Date Issued
1989
Publisher
MIT Center for Energy and Environmental Policy
Research
Research
Series/Report no.
Working paper (Massachusetts Institute of
Technology. Center for Energy Policy Research) ; MIT-CEPR 90-011.
Abstract
Public decision makers are given a vague
mandate to regulate industries. Restrictions on their instruments or scope of regulation
affect their incentives to identify with interest groups and the effectiveness of
supervision by watchdogs. This idea is illustrated in the context of the regulation of a
natural monopoly. Much of the theoretical literature has assumed that a benevolent regulator
is prohibited from operating transfers to the firm and maximizes social welfare subject to
the firm's budget constraint. The tension between the assumptions of benevolence and of
restrictions on instruments in such models leads us to investigate the role played by the
mistrust of regulators in the development of this institution. We compare two mandates:
average cost pricing (associated with the possibility of transfers). The regulator may
identify with the industry, but a regulatory hearing offers the advocacy groups (watchdogs)
an opportunity to alter the proposed rule making. The comparison between the two mandates
hinges on the dead-weight loss associated with collusion and on the effectiveness of
watchdog supervision.
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