Regulation and Legislative Choice

Regulation has economic and political dimensions, both of which I endogenize in this hierarchical model in which a legislature chooses by majority rule the mandate of an agency that faithfully regulates a firm with private information about its costs. Sufficient conditions are given for an equilibrium to exist. If there is a strong electoral connection between the benefits delivered to constituents and their electoral support, the legislature will choose a regulatory mandate that favors consumer over producer interests and results in regulation that does not maximize expected total surplus. Political interest in delivering benefits to constituents through factor employment results in a regulatory mandate that yields greater expected total surplus.