472. Regulatory behaviour under threat of court reversal

Flavio Menezes, Magnus Söderberg and Miguel Santolino, School of Economics Discussion Paper No. 472 November 2012, School of Economics, The University of Queensland. Australia.

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Abstract

This paper investigates the review processes when customers have complained about conditions proposed by a monopolistic firm. This is accomplished by first developing a theoretical model that considers two possible types of regulators: one who only cares about her career and one who cares about both her career and consumer surplus. When the regulator is only concerned with her career, it is predicted that, under certain conditions, a larger number of decisions will be overturned by the appellate court in more complex cases than in less complex cases. The model also predicts that when the regulator cares about both her career and consumer surplus, less complex cases will be associated with more appeals by regulated firms, but fewer decisions will be overturned and prices will be lower. As the complexity of cases increases, the model predicts a switch to more appeals by consumers, more decisions being overturned and higher prices on average. Our empirical analysis based on 409 customer complaints from the Swedish electricity market largely confirms these theory predictions. As an empirical innovation we suggest that the level of bureaucratic effort is measured as the positive disturbance term in a stochastic frontier model.