Independent Utility Regulators: Lessons from Monetary Policy

Regulation Initiative Working Paper No. 52

35 Pages Posted: 15 Jul 2003

See all articles by Jon Stern

Jon Stern

City, University of London - Centre for Competition and Regulatory Policy - Department of Economics

Paul Levine

School of Economics, University of Surrey

Francesc Trillas

Autonomous University of Barcelona - Department of Economics; University of Navarra - IESE Business School

Date Written: December 2002

Abstract

This paper explores the similarity of the underlying economic problems that lead to the establishment of (a) independent central banks to operate national monetary policies and (b) independent regulatory agencies for telecommunications and other utility service industries. We show that, in both cases, the adoption of agencies independent of government results from the need to achieve credibility and a reputation for economically sound long-run behaviour while preserving significant discretion to handle unanticipated events. We show that this solution is superior to policy rules that are fixed in advance. Both for central banks and regulatory agencies, what is required are institutions that provide limited and accountable discretion within a clear policy framework, for example via high levels of accountability and transparency in their decision making processes. On the basis of a review of the empirical literature, we argue that central banks with superior governance arrangements, particulary on accountability and transparency, out-perform those with inferior arrangements and we discuss how this work might be extended to utility regulatory agencies.

Keywords: Monetary Policy, credibility, regulation, under-investment, delegration

JEL Classification: C72, E61, L51

Suggested Citation

Stern, Jon and Levine, Paul L. and Trillas Jané, Francesc, Independent Utility Regulators: Lessons from Monetary Policy (December 2002). Regulation Initiative Working Paper No. 52. Available at SSRN: https://ssrn.com/abstract=371680 or http://dx.doi.org/10.2139/ssrn.371680

Jon Stern (Contact Author)

City, University of London - Centre for Competition and Regulatory Policy - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Paul L. Levine

School of Economics, University of Surrey ( email )

Guildford
Surrey GU2 7XH
United Kingdom
+44 1483 259 380 Ext. 2773 (Phone)
+44 1483 259 548 (Fax)

Francesc Trillas Jané

Autonomous University of Barcelona - Department of Economics ( email )

Avda. Diagonal 690
Barcelona, 08034
Spain

University of Navarra - IESE Business School

Avenida Pearson 21
Barcelona, 08034
Spain

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