INDEPENDENT REGULATORS: THEORY, EVIDENCE AND REFORM PROPOSALS

Abstract

Regulatory independence has been proposed as a mechanism to alleviate the commitment problem associated to the sunk nature of investments in network industries. This paper summarizes the author’s and others’ work in this field (in a pause to take stock of several years of research) and, in addition, includes a new exercise that uses instrumental variables to endogenize both de jure and de facto regulatory independence. The institution of regulatory independence has costs as well as benefits; the positive and significant impact on industry performance is however most likely quantitatively modest. As a result of the empirical evidence and the assessment of the literature, some reform proposals are made to improve the effectiveness of the institution.