The TCE approach of Regulation and Politics

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Leslie Jenkins
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!! Contracting with the Government: Introducing Political Game and Institutions into the Contractual Relationship The Political Game

1 Regulation, Public Service Provision and Contracting 1 Eric Brousseau University Paris-Dauphine eric@brousseau.info Class 4 Contracting with the Government: Collusion, Lobbying, Third Party Opportunism, The TCE approach of Regulation and Politics 2!!! Contracting with the Government: Introducing Political Game and Institutions into the Contractual Relationship The Political Game around Regulation The Issue of Independent Agencies Rather than considering the politic as evil, applying the assumption of opportunism/rational choice to political behaviors

2 Contracting with the Government 3! Transaction cost regulation vs.! Chicago School (Stigler, 1971; Peltzman, 1976; Posner, 1971): sectoral specificities! Incentive Theory (Loeb & Magat, 1979; Baron & Myerson, 1982; Laffont & Tirole, 1993): institutions matter! What Characterize Utilities! Governmental Opportunism! Third Party Opportunism! Interactions What Characterizes Utilities 4! Specific Investments / Incentives! Economies of Scale and Scope / Monopoly! Widespread Domestic Consumption / Political sensitivity Market failures**! Government active in the organization of the provision of the services! Quality standards and Pricing (because of the poor ability of individual users to negotiate/exit)

3 5 Governmental Opportunism: Determinants! Sunk Investments Operating as long as Op Revenues>Op. Costs i.e. Price < Average cost (because of fixed costs)! Political Game Gvtal incentives to please voters by expropriating Operators ex-post Institutional limitations! Check and Balance: Fragmented polity or Judicial Independence! Rigid regulatory contracts 6 Governmental Opportunism: Implications! Investment inefficiencies! Underinvestment! Selection bias: High Profit and Rapid Return! Bias in the selection of technology (less specificity)! Lack of maintenance! Too high prices => Perverse loop! Regulation! Regulatory framework**: price setting, conflict resolution, investment policy, quality control

Third Party Opportunism 7 Spiller: Third parties not necessarily interested in the success of the relationship: political opponents, excluded bidders, interest groups Third Party Opportunism 8!

4 Third Party Opportunism 7 Spiller: Third parties not necessarily interested in the success of the relationship: political opponents, excluded bidders, interest groups Third Party Opportunism 8! Public good provision => Public scrutiny! Judicial Review! Bureaucratic oversight! Congressional and Political scrutiny Risk of opportunistic behavior! Political game => Regulatory Relationship! Limitation of the discretion at the negotiation stage and of the flexibility as the implementation stage! Impact on Performances! Low incentives scheme, Rigidity, Proceduralization! Transaction costs, default of adaptability/fitness! No exit since internalization raise the same issues

5 Third party Opportunism 9 Optimal Contract Specificity and Rigidity Political Game: buy, lobby or sue 10! Buying influence (e.g. campaign contribution in the US)! Direct Influence (on the target s behavior): low contribution and weak impact (De Figuereido & Snider, 2003)! Indirect Influence (on the behaviors of the contacts of the target): strongly depending upon splitting between congress and government (Spiller, 1990)! Lobbying for influence! Direct Influence: Depending upon participation of other interest groups (De Figueiredo, Spiller and Urbiztondo, 1999)! Indirect Influence: Providing information to friendly legislator (Hojnacki & Kimball, 1998) / Oversight by interest groups to change the preferences/expectations of legislators (De Figueiredo & al., 1999)! Suing for influence! Tools for interest group without low political influence (Olson, 1990)! Judicial threat to discipline public officials (Dab Bo & di Tella, 2006)

6 Choice of instruments 11! Interest Groups! Contribution: coherent group with clear objective (Ansolabehere, Snyder & Tripathy, 2002)! Lobbying: large groups (idem)! Litigation: depending upon distribution of ideological position between courts, policy makers and interest groups (De Figueiredo & De Figueiredo, 2002)! Institutional framework (examples)! Courts decision might be influenced by lobbying, and hence lobbying influences indirectly policies => Lobbying depending upon judicial independence (Spiller & Tommasi, 2006)! Role of the electoral system " Majority/First-pass-the post system / Local Representatives centered systems: Members of the Congress have incentives to invest in policy design and implementation (hence the above quoted litterature) " Vs. Proportional Representation / Party centered systems in which party : Political game organized around nomination process on party lists (with party leaders favoring turnover in the parliament to guarantee allegiance) : Influence strategies targeting central decision maker in the party system (Bennedsen & Feldmann, 2002)! Others: organization of the bureaucracy, actual horizontal and vertical division of power (underanalyzed) 12 The many levels of the Regulatory Game! Civil Servant and experts: agenda setting, recommendation! Commissioners: veto power! Judges: ideology, career concern

7 Lobbying strategies 13! Offensive interest groups! will pursue their interests in more policy-durable institutions.! will be less likely to pursue their interests the greater the number of veto points in the institution.! The higher the probability of passage of a rule in a policydurable institution, the more likely opposing (defensive) interest groups will not oppose the same or a more diluted policy position in policy non-durable institutions to disincentivize the policy-durable institution from acting.! As the complementarity of political effort across institutions increases, the breadth of political effort across institutions will increase.! Policies passed by non-durable policy institutions will result in less long-term investment than the same policies passed by policy-durable institutions. 14 Insulate or not: the problem with agencies! Weberian ideal! Perfect and Neutral tool! Public Choice approach! Self-interested coalition of bureaucrats / Democratic drift! McCubin & Schwartz (1984), Mc Cubin, Noll & Weingast (1989)! Independent agency under the control of stakeholders who ring the bell in case of drift! Majone (2001) and Alter (2008)! Trustees able to balance expertise, access to information and collective interest

THIRD-PARTY OPPORTUNISM AND THE THEORY OF PUBLIC CONTRACTS: OPERATIONALIZATION AND APPLICATIONS

THIRD-PARTY OPPORTUNISM AND THE THEORY OF PUBLIC CONTRACTS: OPERATIONALIZATION AND APPLICATIONS Marian Moszoro IESE Business School, Barcelona Pablo Spiller University of California, Berkeley & NBER Public