Regulatory behaviour under threat of court reversal: Theory and evidence from the Swedish electricity market

Abstract

This paper investigates how regulators influence outcomes in regulated markets when their decisions are subject to the threat of court review. We develop a theoretical model that provides a number of behavioural implications when (i) all regulators' dislike having their decisions overturned by courts, (ii) inexperienced regulators care more about not having their decisions overturned than experienced regulators, and (iii) experienced regulators also care about consumer surplus. The theoretical implications are tested using a database of Swedish regulatory decisions from the electricity distribution sector. We provide empirical evidence that inexperienced regulators are more likely to set higher regulated prices than experienced regulators, and as the complexity of the case increases, there are on average more overturned decisions and higher prices for inexperienced regulators. The links between experience, complexity and regulatory outcomes are both statistically and economically significant. Simulations show that if those decisions that were not appealed had been appealed, then the court would have lowered the prices by 10% on average.