The political economy of regulatory risk

I investigate political uncertainty as a source of regulatory risk. Political parties have incentives to reduce regulatory risk actively through institutionalizing politically independent regulatory agencies. Political parties benefit from fully eliminating regulatory risk when political divergence is small or electoral uncertainty is appropriately skewed. In general, the political system allows only an incomplete reduction in regulatory risk and requires regulatory agencies with only partial political independence. The benefits from reducing regulatory risk follow from a fluctuation effect that hurts both parties and an output–expansion effect that benefits at most one party.