Rule versus discretion: regulatory uncertainty, firm investment, and bureaucratic organization

Montagnes, B. Pablo and Wolton, Stephane (2016) Rule versus discretion: regulatory uncertainty, firm investment, and bureaucratic organization. The Journal of Politics . ISSN 0022-3816 (In Press)

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Abstract

As markets evolve, new regulatory concerns emerge. In response, policymakers institute new requirements for private businesses. Because they impose costs and generate uncertainty, these requirements may deter firm investment. To reduce regulatory uncertainty and favor investment, a principal can choose a rule-based regulatory framework. However, unlike discretion, rules do not adapt to circumstances and are thus inefficient. Using a micro-founded model, we uncover circumstances under which the ex-ante cer-tainty provided by a rule dominates the ex-post efficiency provided by delegation to an unbiased agent. We also establish when delegating to a biased agent is optimal for a policymaker. Our main results highlight that the anticipated economic responses of firms can indirectly influence the organization of the bureaucracy. As such, any attempt to evaluate firms' direct influence in the rule-making process|through lobbying or information disclosure|needs to establish the proper counter-factual that accounts for the indirect effects this paper identifies.

Item Type:	Article
Official URL:	http://www.journals.uchicago.edu/toc/jop/current
Additional Information:	© 2016 University of Chicago Press
Library of Congress subject classification:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management J Political Science > JF Political institutions (General) J Political Science > JX International law J Political Science > JZ International relations
Sets:	Departments > Government
Date Deposited:	06 Jul 2016 13:38
URL:	http://eprints.lse.ac.uk/67075/

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