Even though regulation is often described as a principal-agent problem between the government and the operator, there are actually several principal-agent relationships involved. The regulator is an agent for the government, serving as the principal in the government’s principal-agent relationship with the operator. The government seeks to control its regulator-agent through laws, courts, budget control, fixed terms, and transparency requirements rather than through incentives. There is also a principal-agent relationship between the customers, serving as the principal, and two agents, namely the government and the regulator. Customers regulate the government and the regulator through political processes and regulatory processes reviewed in Chapter VII.1
The following chapters describe numerous mechanisms of regulation. Chapter II covers the Market Structure and Competition techniques. Chapter III examines Financial Analysis, which relates to both the information gathering and incentive regulation solutions to the information asymmetry between the regulator and the operator. It also covers additional information issues. Chapter IV focuses on using incentive regulation in Regulating Overall Price Level and Chapter V covers the related Tariff Design issues. Chapter VI focuses on Quality, Social, and Environmental Issues. Finally, Chapter VII examines the Regulatory Process, which is the public’s main instrument for regulating the regulator.
- See Regulatory Process for information regarding mechanisms used to address these principal-agent relationships.