Nova workboard

a blog from young economists at Nova SBE

Quis custodiet ipsos custodes? (Who will guard the guards themselves?)

The idea of having independent regulatory agencies that pursue the maximization of the Social Welfare and promote stability in Capitalism seems to be extremely appealing. Moreover, the regulation of markets is acknowledged as an important mechanism to safeguard the environment. However, this exercise faces substantial problems when it is converted to practical policy making issues across industries and time.

The first problem is exactly how to explain accurately what is the public interest. Even if we believe that is possible to consider a Social Utility Function and aggregate preferences in a competent way (Arrow, 1951), we may question the benevolence of politicians in the context of the principal-agent problem. As Downs (1957) described it: what reason is there to believe that the men who run the government would be motivated to maximize [total surplus]? To state that they should do so does not mean that they will.

The notion that the public administration may be captured by powerful private interests has been an endless theme in political philosophy. As a matter of fact, similar thoughts are present in the works of Montesquieu, Jean Jacques Rousseau and Karl Marx. Governments are composed by individuals that might be prone to conflicts of interests. Nevertheless, this debate was only introduced in modern economic analysis in the second half of the XX century (Stigler, 1962). From that moment on, three distinct but complementary Schools of Thought have been developed to clarify why the risks for devious behaviors may arise in the form of regulatory capture and/or regulatory opportunism. I try to summarize their main arguments and proponents in the following figure:

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In this regard, it is important to distinguish lobbying activities (legal, legitimate and attached to broader interests) from corruption (illegal, requires savoir faire and is devoted to a narrow interest). The latter can be strongly influenced by cultural norms (Miguel and Fisman, 2007).

In Portugal, less than two months ago, a new Lei Quadro das Entidades Reguladoras has been aproved. It introduces some new relevant rules namely the increase in terms of office to 6 non renewable years, a more transparent budget structure, new veto powers to the President of the Regulatory Board and, finally, appointments have to be evaluated by the Parliament. This new set of criteria is believed to increase de facto independence and accountability. 

To conclude, economists should always be concerned with the consequences of any institutional reform. For the past decades, the western world has witnessed a process of deregulation in a number of industries like transportation, communication and financial services with consequences that were not yet fully evaluated. Last but not least, they should always bear in mind the following idea presented by Majone (2005): The expression “Independent Agency” is, strictly speaking, an oxymoron: a combination of contradictory terms. (…) Far from being a semantic quibble, this question exposes a serious conceptual ambiguity in prevailing ideas about the delegation of powers to regulatory agencies.

João Pereira dos Santos

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Author: studentnovasbe

Master student in Nova Sbe

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