We thank Marie-Pierre Boé for assistance and the Agence Nationale pour la Recherche for its financial support. We are particularly grateful to Perrin Lefebvre for outstanding research assistance. We thank two referees and Jim Hosek for important suggestions and comments that helped us to significantly improve this article. We also thank for helpful comments Ricardo Alonso, Jérôme Pouyet, and Joel Sobel, as well as seminar participants at ETH Zurich, the Max Plank Institute in Bonn, EEA in Oslo, EAERE in Gothenburg and Rome, ETH-Zurich Workshop in Ascona, ASSET Meeting in Florence, AFSE Thematic Meeting in Toulouse, CSEF-IGIER in Capri, ESEM in Barcelona, Paris School of Economics, Nanterre University, Université de Lille (SIUTE), the Eighth Journées Louis-André Gérard-Varet Conference in Public Economics in Marseille, and Princeton Workshop in Political Economy. All errors are ours.
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How much discretion for risk regulators?
Article first published online: 19 JUN 2012
DOI: 10.1111/j.1756-2171.2012.00166.x
© 2012, RAND.
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How to Cite
Hiriart, Y. and Martimort, D. (2012), How much discretion for risk regulators?. The RAND Journal of Economics, 43: 283–314. doi: 10.1111/j.1756-2171.2012.00166.x
Publication History
- Issue published online: 19 JUN 2012
- Article first published online: 19 JUN 2012
- Abstract
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We analyze the regulation of firms that undertake socially risky activities but can reduce the probability of an accident inflicted on third parties by carrying out non verifiable effort. Congress delegates regulation to an agency, although these two bodies may have different preferences toward the industry. The optimal level of discretion left to the agency results from the following trade-off: the agency can tailor discretionary policies to its expert knowledge about potential harm, but it implements policies that are too “pro-industry.” The agency should be given full discretion when the firm is solvent; partial discretion is preferred otherwise. We then investigate how this trade-off changes as the political and economic landscapes are modified.