DP10838 Politically Induced Regulatory Risk and Independent Regulatory Agencies

Author(s): Roland Strausz
Publication Date: September 2015
Keyword(s): electoral uncertainty, independent regulatory agency, regulation, regulatory risk
JEL(s): D82
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10838

Uncertainty in election outcomes generates politically induced regulatory risk. Political parties' risk attitudes towards such risk depend on a fluctuation effect that hurts both parties and an output--expansion effect that benefits at least one party. Notwithstanding the parties' risk attitudes, political parties have incentives to negotiate away all regulatory risk by pre-electoral bargaining. Efficient pre-electoral bargaining outcomes fully eliminate politically induced regulatory risk. Political parties can implement such outcomes by institutionalizing politically independent regulatory agencies and endowing them with a specific objective.