Centralization Versus Separation of Regulatory Institutions

Centralization Versus Separation of Regulatory Institutions

December 15,2016Working Paper No. 3489

Why might a country choose a decentralized rather than a centralized regulatory structure? And what might reverse this choice? We consider a core institutional relationship in regulation. A regulator exerts effort towards a final outcome, but an oversight authority can intervene, which prevents the final outcome from being reached. We examine the choice between institutional centralization and separation, where centralization affords the oversight authority more information on the probable outcome. This creates a static trade-off in which more information lowers regulatory effort. Dynamically, institutional separation improves the screening of regulators. This leads to switching between centralization and separation in equilibrium.