Title: Decision costs and the Strategic Design of Administrative Process and Judicial Review
1Decision costs and the Strategic Design of
Administrative Process and Judicial Review
- Pablo Spiller and Emerson Tiller
- Journal of Legal Studies
- June 1997
2Players in the Regulatory Process and their
inter-relations
Supreme Court
Courts
Bureaucracy and other agents
Regulatory Agency
Executive
Firms and investors
Voters
Consumers
Other Interest-groups
Congress and Committee
3Introduction
- Regulatory review The regulatory agencies
decisions can be reviewed by the Courts. - The Courts have to interpret the legislative
intent when the law was approved. - Thus, the Courts are active players in the
regulatory game.
4Introduction
- This paper aims at demonstrating another way that
the Congress can control the agencies
(Congressional Dominance) At this time via
Courts. - Congress would manipulate available resources to
agencies and/or to courts on the game of
regulatory review.
5Game
- Agency - A
- Court of Appeals - CA
- Supreme Court - SC
- Each player has a preferred point Z, where ZA,
CA, SC. - x0 is the status quo.
- x is the policy proposed by the agency.
6Game
- The agency chooses x or x0.
- The CA chooses if maintains x or if revert to
the x0. - The SC chooses to keep CAs decision or to revert
to the status quo x0. - The reversion costs are tCA and tSC to CA and SC
respectively.
7policy
CA
A
SC
x0
x
UA(x)
UCA(x0)
UA(xo)
USC(x)
UCA(x)
USC(x0)
USC(.)
UA(.)
UCA(.)
8- Lets now take into account the decision-costs
and preferences. - Sub-game 1 (agency CA)
- It may require some strategic thinking by the
agency
9policy
CA
A
x0
a
a
c
c
tA
tCA
UCA(.)
UA(.)
UA(.)-tA
UCA(.)-tA
c, c is the non-reversal set of CA. a, a
is the non-reversal set of A.
10In this example the agency would choose c
where its net utility is maximized.
policy
CA
A
x0
a
a
c
c
tA
tCA
UCA(.)
UA(.)
UA(.)-tA
UCA(.)-tA
11Implications
- An increase in the agencys decision costs, tA,
decreases its level of discretion. That is, an
increase of a, a. - An increase in the decision-costs of the CA, tCA,
increases c, c, which gives more discretion
to the agency because there will be more new
policies which will fall within the CAs
nonreversal set.
12Implications
- An agencys inaction cannot be taken as evidence
that the agency prefers or is pleased with the
status quo (x0). The gains in utility of a new
policy (x) may not be worth the decision costs tA
to achieve it even though the agency prefers x to
x0. That is, UA(x)UA(x0) while UA(x) -tA - The CAs decision to reverse a agency does not
necessarily mean a change in the judicial
preference vis-avis a particular policy, but
rather it may simply reflect a reduction in its
decision costs arising from a higher budgetary
allocation from Congress.
13- Sub-game 2
- (CA / SC interactions)
14In this sub-game the agencys policy choice is
taken as exogenously given.
policy
SC
CA
x
x0
c
UCA(x)
UCA(x)-tA
15Notation
- XCA CAs decision
- XCA x, when the CA sustains the agencys choice
- XCA x0, when the CA reverses
- XCA a reversed appealed of CA by SC
- XCA x0 when XCA x
- XCA x when XCA x0
16policy
SC
CA
x
x0
c
c
UCA(x)
UCA(x)-tA
17Policy
SC
CA
x
x0
sx0
sx0
c
c
UCA(x)
UCA(x)-tA
18policy
SC
CA
x
x0
sx0
sx0
sx
sx
c
c
UCA(x)
UCA(x)-tA
19policy
SC
CA
x
x0
sx0
sx0
sx
sx
c
c
UCA(x)
UCA(x)-tA
In this case CA prefers to revert x to x0.
However, if it does this SC reverts from x0 to x,
which is worse to CA. Thus, CA accepts the
policy in x.
20Implications
- The larger the SCs decision costs tSC to review
and reverse the CAs, the more discretion the CA
would have to reverse agencys policy that the CA
dislikes. - Judicial acquiescence (the acceptance by the CA
of a agency policy) is the product of three
conditions - CA accepts the new x if CA prefers x to x0. This
condition occurs without considerations of
decision costs. - CA accepts the new x if CA prefers x0 a x, but
tCA is prohibitive, UCA(x0) UCA(x) - tCA. - CA accepts the new policy x when CA prefers x0 to
x and tCA is not prohibitive, but its reversion
from x to x0 would be override by the SC. That
is, x0 ?sx0, sx0.
21Core Game Agency/ Court of Appeals/ Supreme Court
interactions
- In the first model (A/CA game) we did not
consider the SC review as a constraint on the
actors. - In the second game (CA/SC) we did not take into
account the strategic behavior of the agency
choosing policy. - Now, the authors expand these models by
collapsing them into three level game. - Now the agency needs to anticipate the likely
responses of all players and maximizes its
preferences accordingly.
22CA
A
x0
SC
a
a
c
c
23sx
CA
A
x0
SC
sx0
sx0
sx
a
a
c
c
24Game and its solution
- A forward looking agency will consider the
preferences, decision costs, and institutional
strategies of not only the CA but also those of
the SC, and makes its decision accordingly. - That is, the agency anticipates the likely
response of all players and maximizes its
preference accordingly.
25Solving the game
- Recall that the CAs non-reversal set c, c
represents the range of new agency policies that
the CA will not reverse given the its decision
costs tCA. - Using this range as a reference base, we can
identify three possible policy choices for the
Agency. - Choose a new policy x within c, c.
- Choose a new policy x outside of c, c.
- Just choose to leave the status quo x0 in effect.
261. Choose a new policy x within c, c.
27x1
sx
CA
A
x0
SC
sx0
sx0
sx
a
a
c
c
UA(c) - tA
Note that x1 ? sx, sx thus x1 survives SCs
review
282. Choose a new policy x outside of c, c.
29x1
sx
x2
CA
A
x0
SC
sx0
sx0
sx
a
a
c
c
UA(c) - tA
Note that x1 ? sx, sx thus x1 survives SC
30Equilibrium
- Among the three possible alternatives, the agency
gets the highest net utility from choosing x2. - Thus, x2 becomes the equilibrium choice.
- Note that the CA acquiesces to the As decision
even though the CA prefers x0 to x2. - This result because the SC will revert any
attempt of the CA to overturn the Agencys
decision given the SQ falls outside the SCs
non-reversal set.
31- Institutions for Commitment in the Brazilian
Regulatory System - Bernardo Mueller
- Dep. of Economics
- Universidade de Brasília
- February 2000
32Objective
- To argue that the privatization process and the
public utility regulation has a satisfactory
outcome in Brazil. - To explain what are the institutions and other
factors responsible for that.
33What does satisfactory mean?
- It does not mean absence of problems .
- Good future expectations.
- Society recognition.
- Privatization got positive financial returns
- The privatized sectors have been reformed and
with some sort of competition being introduced. - The regulatory system has been established.
- The burn of the proof should be on those who say
otherwise.
34Institutional Background e Assumptions
- Executive preponderance
- Decree power
- Control of the committee system
- Discharge petition
- Special committees
- Initiate new legislation
- Veto power
- patronage.
35Institutional Background e Assumptions
- This preponderance is important because the
executive is the main force behind the
privatization. A strong executive endorsing the
reforms is able to protect investors in
privatized companies - however, the downside is that the executives
discretionary power also allows it the means to
take measures against investors. Thus, it is a
source of several other problems - Delegation dilemma. Trade-off between flexibility
e control.
36Institutional Background e Assumptions
- Independent Judiciary
- Assumption 1- the SC is independent of the
executive, as far as the concession contracts. - Assumption 2 the Supreme Court's preferences
favor contracts (legalist behavior). - 11 members and just one was appointed by FHC
- There is no congressional review
- The SC has an independent budget
- Several cases that the SC decided against
executives preferences
37Institutional Background e Assumptions
- 1 - SC acts legalistically
- SC is a political player.
- There are very few studies about judicialization
of politics. - Cases about salaries it is expected high degree
of polarization. - However, in cases such as privatization and
regulation it is not that clear. - Castro argues that the SC has been reluctant to
take this role, but the society is demanding that.
38Restrictions over the Executives discretion
- Assumption about the relationship between the
executive and regulatory agencies - The principal-agent problem is not too severe and
the executive is able to control the agencies
regardless their institutional independence
(simplification)
39Restrictions over the Executives Discretion
No-tension scenario
40Restrictions over the Executives Discretion
An independent judiciary as a restraint on
executives discretion.
41Restrictions over the Executives Discretion
- Why the decision costs of the SC.
- Opportunity costs of analyzing an issue.
- Political confrontation.
- Revert a agencys decision requires procedures
more expensive than sustain it.
42Restrictions over the Executives Discretion
Credibility as a restriction.
43Election of a New President
- It generates risk for investors..
- Safeguards
- Coalition-based presidential system.
- Structure and process of the regulatory agencies.
McNollgast (deck-stacking e automatic pilot).
44Conclusions
- There are institutional safeguards (judiciary e
presidential coalition-based) and
non-institutional (credibility costs). - Those are relatively fragile commitments, but
they have been working so far