Saturday, November 11, 2017

A taxonomy of "good and bad" regulatory biases

In the context of the holdup problem in regulation (the regulator facing incentives to hold up the sunk assets of the firm), I can see from my current research that potential departures from the traditional assumption of rationality in regulators of network industries (or other similar) can be classified in three categories:
-Satisficing behavior or similar departures from standard preference or social welfare maximization: regulators have been observed to try to avoid problems and keep a low profile (minimal sqwak behavior, omission bias). Similarly, their behavior seems to differ depending on age or professional background. There is also a literature on the impact on decision-makers of apparently irrelevant factors such as mood, hunger or similar.
-Expert Bias: regulators are not immune from some psychological biases like availability bias or confirmation bias or herd behavior (for example, in sports referees). There is a corresponding literature on de-biasing mechanisms or factors that contribute to diminish the influence of behavioral anomalies (like technology or monetary incentives).
-Process: one of the findings of behavioral economics is that individuals care not only about outcomes, but also about processes. That opens up a new set of policy tools for regulators and regulatory institutions. Reforms or policies are better accepted when they are “owned” by citizens, rather than imposed from external forces, as shown in experiments. The Acceptability/Legitimacy of regulatory decisions that may be vulnerable to populist pressure depends then on narratives or “stories,” as argued by Akerlof. The endogeneity of preferences and social norms matters for the success of efficient reforms and policies.
Knowing better and taking into account these phenomena may help design or nudge institutions to make them more effective and robust.

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