Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation

Arbeitspapier

Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short term contracting. A pure consumer standard alleviates the regulator’s myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find it less attractive to exaggerate costs. This reduces the need for long term rents and mitigates ratchet effects. A welfare standard biased towards consumers entails, however, allocative costs arising from partial separation of the firms’ cost types. A trade-off results which favors strategic delegation when efficient firms are relatively likely.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 4758

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Economics of Regulation
• Subject: dynamic regulation ; strategic delegation ; consumer standard ; ratchet effects ; limited commitment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fiocco, Raffaele ; Strausz, Roland
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/96831
• Last update: 10.03.2025, 11:44 AM CET