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Title: Decision costs and the Strategic Design of Administrative Process and Judicial Review


1
Decision costs and the Strategic Design of
Administrative Process and Judicial Review
  • Pablo Spiller and Emerson Tiller
  • Journal of Legal Studies
  • June 1997

2
Players 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
3
Introduction
  • 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.

4
Introduction
  • 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.

5
Game
  • 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.

6
Game
  • 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.

7
policy
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

9
policy
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.
10
In 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
11
Implications
  • 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.

12
Implications
  • 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)

14
In this sub-game the agencys policy choice is
taken as exogenously given.
policy
SC
CA
x
x0
c
UCA(x)
UCA(x)-tA
15
Notation
  • 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

16
policy
SC
CA
x
x0
c
c
UCA(x)
UCA(x)-tA
17
Policy
SC
CA
x
x0
sx0
sx0
c
c
UCA(x)
UCA(x)-tA
18
policy
SC
CA
x
x0
sx0
sx0
sx
sx
c
c
UCA(x)
UCA(x)-tA
19
policy
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.
20
Implications
  • 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.

21
Core 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.

22
CA
A
x0
SC
a
a
c
c
23
sx
CA
A
x0
SC
sx0
sx0
sx
a
a
c
c
24
Game 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.

25
Solving 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.

26
1. Choose a new policy x within c, c.
27
x1
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
28
2. Choose a new policy x outside of c, c.
29
x1
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
30
Equilibrium
  • 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

32
Objective
  • 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.

33
What 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.

34
Institutional Background e Assumptions
  • Executive preponderance
  • Decree power
  • Control of the committee system
  • Discharge petition
  • Special committees
  • Initiate new legislation
  • Veto power
  • patronage.

35
Institutional 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.

36
Institutional 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

37
Institutional 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.

38
Restrictions 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)

39
Restrictions over the Executives Discretion
No-tension scenario
40
Restrictions over the Executives Discretion
An independent judiciary as a restraint on
executives discretion.
41
Restrictions 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.

42
Restrictions over the Executives Discretion
Credibility as a restriction.
43
Election 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).

44
Conclusions
  • 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
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