L **I)teICy RI SF ARCH WORKIN(, PAPER 12.39**

# Summary findings

Sappington Contrasts cottiand-a.d-control regulation (tight control of water pu rification, for examt pIle) withi miiore flexible form11s, including inscetivc regulation (suich as price cap rqgulatioi), pote ntial rcgulation (providing for closer scrutiniy if cnoLugh customers complain), and reactive rat ler thlian proactive policies (tie finin proposing actiois, the iegulator saying yes or no).

Hc contrasts informing regulation (for cxamiple, requiring that consuLiiers b: informed about ingiedicits in a product) and cnforcinig regulation (for cxamiplc, prohibitinig the usc of certain chemlicals in foods).

He also contrasts cotuprehcnisive rcguilation (typical in telecmmununications) and partial regulation (morc typical in pharmaceuticals).

A country's institutionial struicture can liniit the reguiators' poteintial for comimiiliteilncit, lie sayvsespecially if regulators are limlited in their ability to delivcr rewardls or penalties.

The scope and function of regulation may also be tairly limitcd weicn technological conditions allow comipctitionl to discipline produccrs. Sophisticated buyers with c-onomic powcr may reducc the need for regulatory control, and rapid techitological changc cai rtender comiprehcinsive conitianld-aid-control r(gulationi ineffective or debilitating.

Many forces opcratc sinultailcously, making regulatory design a comp!cx undertakinltg Inicrtia is one suich influence. Reg latorv policies that once scrved an important pturpose soticti iics persist vcii tliolugh tticy no longer scrvc thiat purpose --- sonictimies becaiuse they favor a constituieicy tl at convinceS tbc regulator to keep the controls in place. Subsidies atid tariff protection oftcii contiuic .)ng past the time necded to pronmotc the developnicit of an infanit inidustry, for cxamp!c. Whcn thcre is limited public ouitcry against continuinig **thc** special trcateilcint, atid thc affected firms strongly urge its contiicuance, thc regulator may be convinced to continue spccial trcatminent that no longer scr,rcs the public intcrcst.

Regulrktion may also bc atfccted by thc rcgulators' personal amibitionis Wlhen regulators are 'captured" by - regulated firms diverted froml the goal of protecting coisuniers thirough the promise of personal rewards for favorable treatmcilt of the firms - rcgtlatioti nay not scrve fociety's best interests.

Even if regiulators are not motivated by self-interest, thcir idcas of wliat is best for society may differ from those of other goverriment officiais or (,f society at large Whcn tLat happcns, whiich goals arc pursucd depends largely oti the autoriotly regulators are granted and on tthc balance of powcr aniong govcrnimeint bodies. Rcgulation shiould be viewed in this larger context to be uniderstood fullY This paper -- a product of the Office of tilc Vice Prcsidcrit, Dcvelopment !hconon'.ics .- is onc in a scries of backgroun papers preparcd for _World l)evelopnent Ref ort 1994._ C(opics _oi_ the paper are available frcc from the Workl Bank, 18 1 H Strcet NW, Washi ngton, DCl 2043.3. PIlcasccL ontalct ti _c'orld l)ci 'clopnent Rteport_ offiec, room '17-101, extension 3139 (47 pages). january 1994.

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