The Subsidiarity Bias in Regulation

We study the choice of the regulatory structure when a firm engages in different activities for different countries. Under decentralization regulatory contracts suffer from two opposite distortions: the competition between regulatory authorities leads to too high-powered contracts; however, with a dispersed ownership structure, contracts tend to be too low-powered. For sufficiently substitutable activities, decentralization always leads to an inefficient drift 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, decentralization may be preferred to centralization as competition between regulatory authorities mitigates their discretionary power.

LAFFONT, J.J. and POUYET, J. (2004). The Subsidiarity Bias in Regulation. Journal of Public Economics, 88(43862), pp. 255-283.

Keywords : #Incentives, #Decentralization, #Regulation