ELECTED VERSUS APPOINTED REGULATORS

ELECTED VERSUS APPOINTED REGULATORS: THEORY AND EVIDENCE

T. Besley & S. Coate

A Summary 

In a Nutshell

Directly electing regulators leads to more consumer-oriented policies. This is explained in theory and observed in lower residential electricity prices in states where regulators are elected rather than appointed. This may seem intuitive, but if regulators are appointed by elected officials, then those officials surely have as much interest in promoting consumer interests as directly appointed regulators. The reason this expectation is frustrated is because where regulators are appointed, regulation comes bundled with other issues.

 The Model

There are two politically salient issues:

  1. Public spending
  2. Regulation

 There are two types of voters regarding regulatory issues

  1. Stakeholders – capitalists invested in regulated firms. They always prefer higher profits and therefore want higher prices.
  2. Consumers – always prefer lower prices. However, getting these prices is less important to them than having their preferred public spending outcome. There are numerically more of these than of the previous type.

 There are two types of voters regarding policy issues

  1. Rational voters – they elect candidates based on the payoffs they receive from their election
  2. Noise voters – respond to hair colour, sense of humour etc.
  • The government chooses the level of public spending and regulates monopolies.
  • There are two political parties and each contain both stakeholders and non-stakeholders, but a majority of the latter.

 Elected Regulators

  • Each party can field either a consumer-oriented or stakeholder-oriented candidate. As rational voters vote on regulatory stance, consumer-oriented candidates have an electoral advantage, and are also preferred by a party majority. Thus, both parties field such a candidate and the inner is determined by noise voters. Such a system yields a pro-consumer regulator.

 Appointed Regulators

  • Type of regulator is determined by the regulatory stance of the winning candidate. Both public spending and regulation are relevant for voters. However, consumers prefer the candidate that shares their public spending priorities irrespective of his regulatory stance. Stakeholders go with the regulatory stance irrespective of public spending priorities. Assuming the parties field candidates with different spending plans, they both have the incentive to offer pro-stakeholder candidates.
  • If both parties are offering pro-consumer candidates, one of them can switch to a pro-stakeholder candidate and steal all of the other parties stakeholder voters (for whom regulation is more important than public spending stance) whilst losing none of their consumer voters (for whom public spending is more important than regulatory stance). This means his chance of winning is increased. The other party has the same incentive.
  • This only works if their spending platforms are different, as if they are identical the election will be fought only on regulation.
  • Thus, in such a system the elected regulator is always pro-stakeholder. The regulator type is bundled with other issues, and regulatory policy is salient only for those who wish to secure a high price in the regulated industry. This means a party can gain by running candidates with a pro-stakeholder regulatory attitude.
  • By unbundling the issues by election the regulatory capture is not possible

 Evidence

  • Electors have lower residential prices than appointed.
  • Results could be endogenous.
  • Influence of regulators likely to be much larger in times of increasing input prices since rate reviews are more likely in such circumstances.
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