Information Acquisition and Crowding Out in Regulatory Hierarchies

This paper studies an externality common to all policy setting hierarchies in which information acquisition is essential to making policy decisions. The paper analyses the regulation of a monopolist with unknown cost both by a state and a federal agency with overlapping jurisdictions. When the objectives of the two tiers in the regulatory hierarchy differ, and the federal agency relies at least in part on the information acquired by the state regulator, the state agency has the incentive to acquire less than full information about the monopolist in order to prevent interference by the federal regulator. In this sense, the possibility of intervention by a higher level agency in the hierarchy crowds out information, and forces an apparently collusive (‘regulatory capture’) outcome in which the state regulator aligns itself with the interests of the monopolist. When crowding out is significant, policy decisions in a hierarchy may be worse than those made by single-tier organisations. The overlap of jurisdictions in hierarchies not only duplicates effort and wastes time and resources; more importantly, hierarchical decision-making wastes information. JEL Classification: D83, H11, K23, L40, L51