Regulation with an Agenda

Abstract:     
The dominant economic perspective on industrial (e.g., telecommunications) regulation is that it is governed by lobbying interests, such that all regulatory windfalls are shared among competing groups based on relative political power. This paper examines how the distributive outcomes of regulation differ if instead the regulator acts based on an "agenda" (i.e., a social welfare function that is a constant-weighted sum of constituent consumers' utilities). Theoretical analysis is undertaken in a regulated monopoly framework modified to account for regulator preferences across consumer groups. It is observed that when (1) there is some group that would not be served at all but for subsidized rates, and (2) the regulator subsidizes rates sufficiently to induce consumption by the group, any increase in the regulator's discretionary funds is captured entirely by that group, rather than being shared. Consequently, windfalls tend to exacerbate cross-subsidies, whereas reducing regulators' discretionary funds reduces subsidies and promotes efficiency.

Keywords: regulation, regulated monopoly, rent seeking, cross-subsidies, telecommunications

JEL Classifications: D42, D6, H2, K23, L12, L51, L96

Accepted Paper Series