Friday, July 11, 2014
The ultimate commitment problem
Today I discussed in a workshop in Barcelona a paper by Jon Stern and Martin Cave on regulatory options for Scotland under two scenarios: independence and enhanced devolution. I said that I agreed on most of what the paper says, and I added a few more insights. I said that it is a paradox that the drive for independence, which is largely based on a rejection of the UK inherited from the Thatcher years, actually a priori says nothing about removing the main aspects of the Thatcher model of utilities regulation, based on privatization, independent regulation (from government) and a license system. The Scottish government only plans to slightly change the structure of regulatory agencies by merging the sectoral regulators. However, in the long run, a sovereign Scotland could in theory change much more, like the ownership of the companies and the degree of regulatory autonomy from government. If a new country can be created by majority rule, the new country will probably be able to do many more simpler things by the same rule. It is an interesting paradox that there is so much discretion embedded in the British legal system that the same prime minister can call a referendum to break the country and another one to abandon the institutions of the single market. The high regulatory quality of British regulatory agencies exists (and would hardly be replicated by Scottish agencies) because there is general awareness that utilities face an underinvestment problem due to time inconsistency of regulatory promises. But actually investors (not only utility investors, but also investors in human capital) face more basically the threat of expropriation of their specific investments by a government that can suddenly facilitate reneging on the basic structure of the state. By the way, today The Economist has pronounced his final verdict on the idea of Scottish independence: it is a bad idea.