The political economy of regulatory risk

In: CESifo working paper series 2953

In: Public choice

Abstract

This paper investigates political uncertainty as a source of regulatory risk. It shows that political parties have incentives to reduce regulatory risk actively: Mutually beneficial preelectoral agreements that reduce regulatory risk always exist. Agreements that fully eliminate it exist when political divergence is small or electoral uncertainty is appropriately skewed. These results follow from a fluctuation effect of regulatory risk that hurts parties and an outputexpansion effect that benefits at most one party. Due to commitment problems, regulatory agencies with some degree of political independence are needed to implement preelectoral agreements.