Regulatory theory: Where the rubber hits the road

Posted on October 15, 2014  /  0 Comments

In today’s Financial Express, Sudhir Shah and Payal Malik conclude their assessment of the work of Tirole and Laffont (who would have been a co-recipient had he lived) concludes thus:

The institutional context for Tirole’s work is also important. While Tirole and numerous collaborators have built a sophisticated theory to guide regulators and thereby accorded regulators an important institutional space in market economies, subsequent work recognises the institutional and political-economy constraints on regulators.

It was pointed out, especially by Laffont, that it is important to recognise that effective regulation is hampered by the weak institutional environment of developing countries, which results in the regulatory contract between governments and firms being incomplete. It is vital that the political system provides a clear objective and mandate to a regulator. The regulator should have the legal basis and the incentives to pursue her mandate. However, the creation and sustenance of independent regulatory institutions requires a substantial degree of political will and judicial maturity. Here in lies the rub.

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