DP2274 Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?

Author(s): David Currie, Paul L Levine, Neil Rickman
Publication Date: October 1999
Keyword(s): Delegation, Procurement, Ratchet Effect
JEL(s): L51
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2274

Delegation to independent bodies whose preference can be different from those of the government has been shown to have beneficial commitment benefits in areas as widely diverse as monetary policy and trade. This paper addresses the case for delegation in the context of a cost-reimbursement procurement problem. Our solution combines several features of the modern regulatory environment: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across regulators available. We find that delegation to an independent industry regulator, whose preferences are more pro-rent than those of the government, can raise welfare by mitigating the ratchet effect.