Adaptive Regulatory Systems

We examine adaptive behavior in forming and changing utility regulatory systems. Systems with independent regulatory agencies dampen the effects of political and market power, and diminish information asymmetries, which improves sector performance. But creating or adapting the system triggers resistance from those who experience loss and at weakens regulatory effectiveness for some period of time. Using empirical studies from behavioral economics and psychology, we construct a model that examines where such losses occur and identify techniques for encouraging adaptive behavior.