The Subsidiarity Bias in Regulation

SERIES Working Paper No. 1

Posted: 24 May 2011

See all articles by Jérôme Pouyet

Jérôme Pouyet

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Centre for Economic Policy Research (CEPR)

Jean-Jacques Laffont

University of Southern California - Department of Economics (Deceased)

Date Written: June 2000

Abstract

We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two opposite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, because the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm’s rent and contracts tend to be too low-powered. When the activities of the firm are sufficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulatory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.

Keywords: Incentives, decentralization, regulation

JEL Classification: D72, H41, H70, L20

Suggested Citation

Pouyet, Jerome and Laffont, Jean-Jacques, The Subsidiarity Bias in Regulation (June 2000). SERIES Working Paper No. 1, Available at SSRN: https://ssrn.com/abstract=1850477

Jerome Pouyet (Contact Author)

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4458 2870 (Phone)
+33 1 4458 2880 (Fax)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jean-Jacques Laffont

University of Southern California - Department of Economics (Deceased)

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