Exceptions to the Rules: Variances from Regulatory Standards

Abstract

In the major areas of regulation, standards can be violated through an appeal process set up as a part of the statutes. This paper formulates a model of the variance appeal process, characterizes the (perfect Bayesian) equilibria of this procedure and studies the welfare properties of these equilibria. I consider two versions of the decision rule used by the appeal board and suggest institutionally feasible alterations in these rules which can improve equilibrium welfare. I also study how obstructionist interest groups can affect the welfare performance of the decision rules.

Keywords: Regulation, interest groups, Industrial Policy

JEL Classification: L5