Regulation and the Ratchet Effect: Should Regulators Be Pro-Industry?

Abstract

The view that some public authorities should be taken out of the day-to-day democratic process and made 'independent' is now widely accepted. Delegation to independent bodies has been shown to have beneficial commitment benefit in areas as widely diverse as monetary policy, international tade policy, firm level R&D and tax auditing. For industry regulation, however although the case for independent regulators is also widely argued, there has been no comoarable study of the role for delegation. This paper addresses this issue in the context of a cost-reimbursement procurement problem. We find that delegation to an indusrty regulator whose preferences are more pro-rent than those of the government can be welfare enhancing.