Political and Economic Analysis of Regulation: Theory and Application

The work presented in this thesis relates to the general theory on the privatisation and regulation of public utilities with particular concern to political economy. Generally speaking, the theory of privatisation and regulation has been considered from either an economic perspective stressing the asymmetry of information between the regulator and the regulated firm and attempting to identify optimal regulatory policy, or from a more political perspective which regards pressure groups or other political actors as the main determinants of policy. Relatively little has been done towards the construction and analysis of models in which economic and political aspects of regulation have been incorporated and investigated. And it is in this area that this thesis makes a contribution. Starting from the now-standard economic model of regulation (Laffont-Tirole) in which the government is essentially not modelled, but taken as a benign despot, I introduce a variety of more political elements. In particular, political parties that are motivated in a variety of ways, electoral competition and strategic behaviour by parties, the endogeneity of political entry, and the possibility of expressive political behaviour. In this way, the idea of the regulation of public utilities has been reviewed and modified to fit in a more complex political structure in which individual consumer/citizens act both as voters in expressing political demands and as customers expressing economic demands.In the attempt to indicate the applicability of these ideas, I also consider the case of the recent history of the regulation of local public utilities in Italy. On the basis of qualitative and quantitative data collected by questionnaire I illustrate the interactions between the political and economic forces in determining the evolution of these local public utilities.