Dynamic Influences on Regulatory Dispute Settlements: The Role of Precedents and Preceding Decisions

Abstract

Compared to general civil disputes, regulatory dispute settlements exhibit unique characteristics such as only one decision-making agent, fewer numbers of cases and lower case type variability. This could increase the likelihood of several decision biases and the first purpose of this paper is to sketch a formalised reasoning around two of these. We argue, first, that regulatory authorities care about their existence and therefore increase the probability of reversing a run of identical decision outcomes as the run gets longer – thus, giving rise to what we denote a ‘survival bias’. We illustrate through simulation how an arbitrary decision is affected by various levels of survival bias. Second, we demonstrate that when decision uncertainty is significant, subsequent decisions will exhibit status quo bias due to the requirement of consistent judgment. The second purpose of the paper is to evaluate the survival and status quo biases empirically (based on 462 dispute settlement from the Swedish electricity market). Additionally, we test our hypothesis that the regulator attaches too much weight to precedents. The estimations show that the regulator is influenced by the survival bias to some extent, the status quo bias to a significant extent and that precedents are used excessively. Based on this, we argue that a single, multi-sectoral regulator has advantages over several independent, sectoral specific regulators.