Accountability in government and regulatory policies: theory and evidence

A key market institution is the degree of accountability to which the officials involved in regulation are exposed. While elected officials strive for re-election, appointed ones are career-concerned. Provided that the effort exerted to uncover the firm’s unknown cost is sufficiently effective in swaying votes, elected officials produce more information than appointed ones do. As a result, when the demand is inelastic, appointment induces wider allocative distortions and higher profits which, in turn, yield stronger incentives to invest. Hence, appointment will prevail on election when investment inducement is sufficiently relevant and shareholders are sufficiently more powerful than consumers. Data on electricity rates and costs, and the methods of selecting regulators and appellate judges for a panel of forty-seven US states confirm these predictions.

Highlights
► Catching why some US states appoint regulators and some other elect them is key. ► The model shows that appointment produces higher allocative distortions and profits. ► Societies will prefer appointment if investment inducement is sufficiently relevant. ► Societies will prefer appointment if shareholders are sufficiently powerful. ► Data on US electricity markets appointment rules, rates and costs back the model.