Home-Bias Effects and the Leadership Role of the EC in Regulation
32 Pages Posted: 12 Jun 2008
Date Written: June 11, 2008
The existence of foreign firms in a regulated market creates a bias in the regulatory level, from the social point of view, whenever firms' profits are valued in the welfare measure and domestic firms count more than foreign ones.
Taking a supranational agency as a (Stackelberg) leader (like the European Commission) improves upon the no-intervention case. In equilibrium, the guidelines of the European Commission will push for less regulation than the national regulatory authorities will actually implement. This is termed the leadership role. The regulatory level announced by the supranational agency is actually higher than the second-best value it would choose. The home bias implies a strategic incentive to distort the announced position of the supranational agency in order to induce further adjustment in national countries.
Some mechanisms set in place by the European Commission (like the consultation procedure in telecommunications) can also be seen as having a monitoring role. In this respect, a notification procedure is, under certain conditions, superior to an ex-post verification (and correction) procedure.
Keywords: regulation, institutional design, telecommunications
JEL Classification: L51
Suggested Citation: Suggested Citation