Good and Bad Consistency in Regulatory Decisions

Abstract

We examine sources of consistent regulatory decisions in a model where regulators respond to mixed incentives, including career concerns. In the reference case, regulators act as public servants who strive to make the socially optimal decision, given limited information and the opportunity to observe the prior decision of another regulator. The addition of career concerns, such as a desire to avoid controversy or to implement a future employer's preferred policy, tends to reduce the degree of differentiation in sequentially taken decisions, hence increasing consistency. Therefore, it is possible to observe that the self-interested career concerns of regulators give rise to consistency in regulatory decision making. This type of consistency might lead to substantial deviations from optimal regulatory policies.

Keywords: L51