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Perceiving Credible Commitments: How Independent Regulators Shape Elite Perceptions of Regulatory Quality

Abstract

Numerous recent studies have addressed how the investment choices of firms depend on elite perceptions of the quality of national regulatory regimes. Likewise, other studies show that government structures can help to support credible commitments that protect market mechanisms. The authors provide the first analytic discussion of elite perceptions of national regulatory quality as a function of the independence of regulators in a country’s political system. Their central claims are that market operations depend on perceptions of regulatory quality and that independent regulators facilitate elite perceptions of regulatory quality because they check actors in domestic political systems. Cross-national statistical evidence suggests that regulatory independence supports elite perceptions of high regulatory quality. This article also provides evidence that regulatory independence is more likely where political competition shapes incentives to intervene in business markets.

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1 Henri L. F. de Groot, Gert-Jan Linders, Piet Rietveld and Uma Subramanian, ‘The Institutional Determinants of Bilateral Trade Patterns’, Kyklos, 57 (2004), 103–23.

2 Daniel Kaufmann and Aart Kraay, ‘Growth without Governance’, Economía, 3 (2002), 169–229.

3 Steven Globerman and Daniel Shapiro, ‘Global Foreign Direct Investment Flows: The Role of Governance Infrastructure’, World Development, 30 (2002), 1899–920.

4 Robert Barro, ‘Determinants of Economic Growth: A Cross-Country Empirical Study’, Development Discussion Paper No. 579 (Harvard Institute for International Development, 1997); Robert E. Hall and Charles I. Jones, ‘Why Do Some Countries Produce So Much More Output per Worker than Others?’ Quarterly Journal of Economics, 114 (1999), 83–116; Dani Rodrik, ‘Institutions for High-Quality Growth: What They Are and How To Acquire Them’, Studies in Comparative International Development, 35 (2000), 3–31; International Monetary Fund (IMF), World Economic Outlook: Growth and Institutions (Washington, D.C.: IMF, 2003); Hossein Jalilian, Colin Kirkpatrick and David Parker, ‘Creating the Conditions for International Business Expansion: The Impact of Regulation on Economic Growth in Developing Countries – A Cross-Country Analysis’, IDPM Working Paper (Manchester, 2003).

5 De Groot, Linders, Rietveld and Subramanian, ‘The Institutional Determinants of Bilateral Trade Patterns’.

6 Philip Keefer and Stephen Knack, ‘Institutions and Economic Performance: Cross-country Tests Using Alternative Institutional Measures’, Economics and Politics, 7 (1995), 207–27; Paolo Mauro, ‘Corruption and Growth’, Quarterly Journal of Economics, 110 (1995), 681–712; Christopher Clague, Philip Keefer, Stephen Knack and Mancur Olson, ‘Contract-Intensive Money: Contract Enforcement, Property Rights and Economic Performance’, Journal of Economic Growth, 4 (1999), 185–210; World Bank, Global Economic Prospects and the Developing Countries (Washington, D.C.: World Bank, 2003).

7 Finn Kydland and Edward Prescott, ‘Rules Rather Than Discretion: The Inconsistency of Optimal Plans’, Journal of Political Economy, 85 (1977), 473–91, p. 487.

8 Kydland and Prescott, ‘Rules Rather than Discretion’, p. 487.

9 For example, Victor Goldberg, ‘Regulation and Administered Contracts’, Bell Journal of Economics, 7 (1976), 426–52; Brian Levy and Pablo T. Spiller, ‘The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation’, Journal of Law, Economics, and Organization, 10 (1994), 201–45; Brian Levy and Pablo T. Spiller, ‘A Framework for Resolving the Regulatory Problem’, in Brian Levy and Pablo Spiller, eds, Regulations, Institutions, and Commitment: Comparative Studies of Telecommunications (New York: Cambridge University Press, 1996); Mario Bergara, Witold Henisz and Pablo T. Spiller, ‘Political Institutions and Electric Utility Investment: A Cross-Nation Analysis’, California Management Review, 40 (1998), 18–35; Pablo T. Spiller and William Savedoff, ‘Government Opposition and the Provision of Water’, in Spilled Water: Institutional Commitment in the Provision of Water Resources (Washington, D.C.: Inter-American Development Bank, 1999); Jon Stern and Stuart Holder, ‘Regulatory Governance: Criteria for Assessing the Performance of Regulatory Systems – an Application to Infrastructure Industries in the Developing Countries of Asia’, Utilities Policy, 8 (1999), 33–50; Sanford Berg, ‘Developments in Best-Practice Regulation: Principles, Processes, Performance’, Electricity Journal, 13 (2000), 11–18.

10 Claudio M. Radaelli, ‘Getting to Grips with Quality in the Diffusion of Regulatory Impact Assessment in Europe’, Public Money & Management, 24 (2004), 271–6, p. 271.

11 Kydland and Prescott, ‘Rules Rather than Discretion’.

12 Torsten Persson and Guido Tabellini, Political Economics: Explaining Economic Policy (Cambridge, Mass.: MIT Press, 2001), p. 298.

13 See Douglass North and Barry Weingast, ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England’, Journal of Economic History, 49 (1989), 803–32; David Stasavage, ‘Credible Commitment in Early Modern Europe: North and Weingast Revisited’, Journal of Law, Economics, and Organization, 18 (2002), 155–86.

14 Persson and Tabellini, Political Economics: Explaining Economic Policy, p. 298.

15 See Frederick Schauer, Playing by the Rules: A Philosophical Examination of Rule-Based Decision-Making in Law and in Life, reprint edn (Oxford: Clarendon Press, 2002); Radaelli, ‘Getting to Grips with Quality in the Diffusion of Regulatory Impact Assessment in Europe’.

16 Delegating an executive task to a cabinet department in the United Kingdom, for example, gives the minister a veto over policy choice, but locating the authority with an independent regulator such as the Water Services Regulation Authority (Ofwat) removes the incumbent government’s policy veto. The creation of such independent regulators is a form of delegation, which, for example, Aghion et al. have operationalized as an increase in the ‘share of votes that can block a leader ex post when he tries to implement legislation’ (Phillipe Aghion, Alberto Alesina and Francesco Trebbi, ‘Endogenous Political Institutions’, Quarterly Journal of Economics, 119 (2004), 565–611, p. 566). In the case of a truly independent regulator, that share of votes for a given action being regulated is driven to infinity.

17 Our approach runs parallel to recent political science literature on regulatory trust, which argues that declining trust in public institutions from scandals and strategic blame shifting by politicians has led, among other things, to more regulation of regulators by other governmental authorities (see generally: Michael Moran, ‘Understanding the Regulatory State’, British Journal of Political Science, 32 (2002), 391–413; Christopher Hood, ‘The Risk Game and the Blame Game’, Government and Opposition, 37 (2002), 15–37; Christopher Hood, Colin Scott, Oliver James, George Jones and Tony Travers, Regulation Inside Government: Waste-watchers, Quality Police, and Sleaze Busters (Oxford: Oxford University Press, 1999)).

18 Generally, the primary target of monetary policy is the inflation rate; this literature shows that even a politician who accepts higher inflation rates has the incentive to delegate to a conservative (inflation intolerant) central banker because of the unforeseen contingency of economic shocks. However, delegation to a central bank is generally not optimal when the bank is completely independent, but rather when there is an ‘escape clause’ the politician can use under extreme conditions to reject the banker’s policy choice (Susanne Lohmann, ‘Optimal Commitment in Monetary Policy: Credibility versus Flexibility’, American Economic Review, 82 (1992), 273–86). See also Kydland and Prescott, ‘Rules Rather than Discretion’; Robert Barro and David Gordon, ‘Rules, Discretion and Reputation in a Model of Monetary Policy’, Journal of Monetary Economics, 12 (1983), 101–20; Kenneth Rogoff, ‘The Optimal Degree of Commitment to an Intermediate Monetary Target’, Quarterly Journal of Economics, 100 (1985), 1169–89; Philip Keefer and David Stasavage, ‘The Limits of Delegation: Veto Players, Central Bank Independence, and the Credibility of Monetary Policy’, American Political Science Review, 97 (2003), 407–23.

19 See Daron Acemoglu, Simon Johnson and James A. Robinson, ‘Institutions as the Fundamental Cause of Long-Run Growth’, in Philippe Aghion and Stephen Durlauf, eds, Handbook of Economic Growth (Amsterdam: North Holland, 2005), pp. 385–472.

20 R. L. Gregory, ‘Perceptions as Hypotheses’, Philosophical Transactions of the Royal Society of London. Series B, Biological Sciences, 290 (1980), 181–97, p. 181.

21 Daniel F. Spulber and David Besanko, ‘Delegation, Commitment, and the Regulatory Mandate’, Journal of Law, Economics and Organization, 8 (1992), 126–54.

22 Acemoglu, Johnson and Robinson, ‘Institutions as the Fundamental Cause of Long-Run Growth’.

23 Yingyi Qian and Barry R. Weingast, ‘Federalism as a Commitment to Preserving Market Incentives’, Journal of Economic Perspectives, 11 (1997), 83–92.

24 Cf. George Priest, ‘The Common Law Process and the Selection of Efficient Rules’, Journal of Legal Studies, 6 (1977), 65–82; Paul Rubin, ‘Why is the Common Law Efficient?’ Journal of Legal Studies, 7 (1977), 51–63; Robert Cooter and Lewis Kornhauser, ‘Can Litigation Improve the Law without the Help of Judges?’ Journal of Legal Studies, 9 (1980), 139–63.

25 Consider the case of Hungarian telecommunications. The government’s divestiture of a majority interest in Matáv – the national telecommunications monopoly – was completed in 1995 (David M. Eisenberg, Linking Privatisation and Regulatory Reform (London: European Bank for Reconstruction and Development, 1998), p. 2, http://www.ebrd.com/country/sector/law/telecoms/about/private.pdf (accessed 6 May 2007)). In 1993–98, the Telecommunications General Inspectorate served as the regulator of the telecommunications industry, but was directly controlled by the Ministry of Transport. During this period, a formal complaint was made by local telephone operators and mobile service providers alleging that Matáv unfairly influenced the Minister for Transport to gain permission to control the interconnection charges levied against other providers for each transmission originating on Matáv’s network (Eisenberg, Linking Privatisation and Regulatory Reform, p. 3). Eisenberg writes that such charges ‘imposed by the dominant telecoms operator are regularly contested by competing operators. The situation in Hungary is therefore unexceptional’ (Eisenberg, Linking Privatisation and Regulatory Reform, p. 3). In the Electronic Communications Act of 2003, an independent regulator – the National Communications Authority – was created. The Authority ‘is an independent central budgetary entity with its own budget and uses its own revenues to cover the costs incurred in relation with the performance of its duties’ (National Communications Authority, ‘About Us’, 2007, http://www.nhh.hu/index.php?id=hir&cid=891&mid=599 (accessed 6 May 2007)).

26 See, e.g., Robert A. Dahl, Polyarchy: Participation and Opposition (New Haven, Conn.: Yale University Press, 1971).

27 Kydland and Prescott, ‘Rules Rather than Discretion’.

28 Jana Kunicová and Susan Rose-Ackerman, ‘Electoral Rules and Constitutional Structures as Constraints on Corruption’, British Journal of Political Science, 35 (2005), 573–606.

29 Gabriela Montinola and Robert Jackman, ‘Sources of Corruption: A Cross-Country Study’, British Journal of Political Science, 32 (2002), 147–70.

30 Keefer and Stasavage, ‘The Limits of Delegation’; George Tsebelis, ‘Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentarism, Multicameralism and Multipartyism’, British Journal of Political Science, 25 (1995), 289–325; George Tsebelis, Veto Players (Princeton, N.J.: Princeton University Press, 2002). See also Matthew Soberg Shugart and John M. Carey, Presidents and Assemblies: Constitutional Design and Electoral Dynamics (New York: Cambridge University Press, 1992), p. 140.

31 Shugart and Carey, Presidents and Assemblies, p. 140.

32 For example, Gary W. Cox and Mathew D. McCubbins, ‘The Institutional Determinants of Economic Policy Outcomes’, in Stephan Haggard and Mathew D. McCubbins, eds, Presidents, Parliaments, and Policy (New York: Cambridge University Press, 2001).

33 For example, Qian and Weingast, ‘Federalism as a Commitment to Preserving Market Incentives’.

34 Acemoglu, Johnson and Robinson, ‘Institutions as the Fundamental Cause of Long-Run Growth’.

35 For example, Douglass C. North, Institutions, Institutional Change, and Economic Performance (New York: Cambridge University Press, 1990); Daron Acemoglu, Simon Johnson and James A. Robinson, ‘The Colonial Origins of Comparative Development: An Empirical Investigation’, American Economic Review, 91 (2001), 1369–401; Acemoglu, Johnson and Robinson, ‘Institutions as the Fundamental Cause of Long-Run Growth’.

36 For example, Rubin, ‘Why is the Common Law Efficient?’ Priest, ‘The Common Law Process and the Selection of Efficient Rules’; Cooter and Kornhauser, ‘Can Litigation Improve the Law without the Help of Judges?’

37 These data are available at http://www.worldbank.org/wbi/governance/pubs/govmatters5.html. See Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi, ‘Governance Matters III: Governance Indicators for 1996–2002’, Technical Report of the World Bank, 2004, for full details.

38 Kaufmann, Kraay and Mastruzzi, ‘Governance Matters III’.

39 Kaufmann, Kraay and Mastruzzi, ‘Governance Matters III’.

40 Kaufmann, Kraay and Mastruzzi, ‘Governance Matters III’.

41 Scott Wallsten, ‘Does Sequencing Matter? Regulation and Privatization in Telecommunications Reforms, Volume 1’, World Bank Working Paper, WPS 2817, 2002.

42 Cf. Andrew Davies, Telecommunications and Politics: The Decentralised Alternative (London: Pinter, 1994); Levy and Spiller, ‘A Framework for Resolving the Regulatory Problem’; David E. M. Sappington and Dennis L. Weisman, Designing Incentive Regulation for the Telecommunications Industry (Washington, D.C.: AEI Press, 1996); Jean-Jacques Laffont and Jean Tirole, Competition in Telecommunications (Cambridge, Mass.: MIT Press, 2000); Paul de Bijl and Martin Peitz, Regulation and Entry into Telecommunications Markets (Cambridge: Cambridge University Press, 2002).

43 Leonard Waverman and Esen Sirel, ‘European Telecommunications Markets on the Verge of Full Liberalization’, Journal of Economic Perspectives, 11 (1997), 113–26, p. 118.

44 A search of Lexis-Nexis during the period of our dataset (1996–2004) uncovers seventy-six articles on independent telecommunications regulators in the Financial Times alone.

45 See Geoff Edwards and Leonard Waverman, ‘The Effects of Public Ownership and Regulatory Independence on Regulatory Outcomes: A Study of Interconnect Rates in EU Telecommunications’, Working paper (London Business School, 2004).

46 Thorsten Beck, George Clarke, Alberto Groff, Philip Keefer and Patrick Walsh, ‘New Tools in Comparative Political Economy: The Database of Political Institutions’, World Bank Economic Review, 15 (2001), 165–76.

47 Beck, Clarke, Groff, Keefer and Walsh, ‘New Tools in Comparative Political Economy’.

48 Beck, Clarke, Groff, Keefer and Walsh, ‘New Tools in Comparative Political Economy’.

49 Beck, Clarke, Groff, Keefer and Walsh, ‘New Tools in Comparative Political Economy’.

50 Ted Robert Gurr, Monty Marshall and Keith Jaggers, Polity IV Project: Political Regime Characteristics and Transitions, 1800–2003, 2003 (available online at http://www.cidcm.umd.edu/inscr/polity/).

51 Beck, Clarke, Groff, Keefer and Walsh, ‘New Tools in Comparative Political Economy’.

52 Acemoglu, Johnson and Robinson, ‘The Colonial Origins of Comparative Development’; Acemoglu, Johnson and Robinson, ‘Institutions as the Fundamental Cause of Long-Run Growth’.

53 George S. Maddala, Limited-dependent and Qualitative Variables in Econometrics (Cambridge: Cambridge University Press, 1983), pp. 117–22; William H. Greene, Econometric Analysis, 5th edn (Upper Saddle River, N.J.: Prentice-Hall, 2003), pp. 787–9.

54 Greene, Econometric Analysis, 4th edn (1999), p. 512.

55 Rogoff, ‘The Optimal Degree of Commitment to an Intermediate Monetary Target’.

56 Spulber and Besanko, ‘Delegation, Commitment, and the Regulatory Mandate’.

57 Montinola and Robert Jackman, ‘Sources of Corruption: A Cross-Country Study’.

58 These data are available at http://www.worldbank.org/wbi/governance/pubs/govmatters5.html. See Kaufmann, Kraay and Mastruzzi, ‘Governance Matters III’, for full details.

59 Daniel Kaufmann, Aart Kraay and Pablo Zoido, ‘Governance Matters’, World Bank Policy Research Working Paper No. 2196, 1999.

* Bertelli: School of Policy, Planning, and Development and USC Gould School of Law, University of Southern California, and Politics Department, University of Manchester (email: ); Whitford: Department of Public Administration and Policy, University of Georgia. The authors wish to thank Christopher Kam, the Editor Albert Weale and the Journal's anonymous reviewers for helpful comments.

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British Journal of Political Science
  • ISSN: 0007-1234
  • EISSN: 1469-2112
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