Independent Regulators: Theory, Evidence and Reform Proposals

Regulatory independence has been proposed as a mechanism to alleviate the commitment problem associated with the sunk nature of investments in network industries. This paper summarizes the author's and others' work in this field (to take stock of several years of research) and, in addition, includes a new exercise that uses instrumental variables to endogenize both de jure and de facto regulatory independence. The institution of regulatory independence has costs as well as benefits; the positive, significant impact on industry performance is, however, most likely to be quantitatively modest. As a result of the empirical evidence and the assessment of the literature, a number of reform proposals are made to improve the institution's effectiveness.