Regulation by Independent Agencies: Who Is the Principal, and What Does She Want

At the center of regulation, as performed by independent agencies, there are two primary principal-agent relationships: downstream, regulatory agencies act as principals vis-à-vis regulated firms; upstream, regulatory agencies themselves act as the agents of government (parliament and/or the executive). This paper looks at the second relationship, which is, of the two, both the more important (because of its position at the top of the decision-making chain) and the less structured (as governments usually do not have direct power, or control, over the agencies – hence the characterization of these as “independent”). In addition, this relationship is further complicated (and muddled) by the presence of a number of influential actors, consumers, firms, experts, the media and the courts. The paper focuses on the complexity of economic and political interests in this relationship to discuss how it affects regulation by independent agencies. The exposition will draw from the available theories of regulation (incentive, or contract, or public choice-based), and considers examples, mainly from transport regulation in Italy. This regulation has evolved considerably over time, and the shapes that it has taken offer evidence of different possibilities as to the operation of the principal-agent relationship, as well as the following regulatory outcomes.