Delegation of Regulation

55 Pages Posted: 25 Aug 2017

See all articles by Tapas Kundu

Tapas Kundu

Oslo Metropolitan University

Tore Nilssen

University of Oslo - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 01, 2017

Abstract

We develop a model to discuss a government’s incentives to delegate to bureaucrats the regulation of an industry. The industry consists of a polluting firm with private information about its production technology. Implementing a transfer-based regulation policy requires the government to make use of a bureaucracy; this has a bureaucratic cost, as the bureaucracy diverts a fraction of the transfer. The government faces a trade-off in its delegation decision: bureaucrats have knowledge of the firms in the industry that the government does not have, but at the same time, they have other preferences than the government, so-called bureaucratic drift. We study how the bureaucratic drift and the bureaucratic cost interact to affect the incentives to delegate. Furthermore, we discuss how partial delegation, i.e., delegation followed by laws and regulations that restrict bureaucratic discretion, increases the scope of delegation. We characterize the optimal delegation rule and show that, in equilibrium, three different regimes can arise that differ in the extent of bureaucratic discretion. Our analysis has implications for when and how a government should delegate its regulation of industry. We find that bureaucratic discretion reduces with bureaucratic drift but that, because of the nature of the regulation problem, the effect of increased uncertainty about the firm’s technology on the bureaucratic discretion depends on how that uncertainty is reduced.

Keywords: bureaucracy, delegation, regulation, procurement

JEL Classification: D020, H100, L510

Suggested Citation

Kundu, Tapas and Nilssen, Tore, Delegation of Regulation (August 01, 2017). CESifo Working Paper Series No. 6589, Available at SSRN: https://ssrn.com/abstract=3024469 or http://dx.doi.org/10.2139/ssrn.3024469

Tapas Kundu

Oslo Metropolitan University ( email )

Pilestredet 35
Oslo, 0167
Norway

HOME PAGE: http://www.tapaskundu.net

Tore Nilssen (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

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