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Regulatory Independence, Investment And Political Interference: Evidence From The European Union

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Executive Summary

This paper examines the implications of "Modern" regulatory governance - i.e. the inception of Independent Regulatory Authorities (IRAs) - for the investment decisions of a large sample of EU publicly traded regulated firms from 1994 to 2004. These firms provide massively consumed services, and this is why governments are highly sensitive to regulatory decisions and outcomes. The authors therefore analyze and empirically investigate if: the inception of IRAs reduces the time-inconsistency problems that lead regulated firms to underinvest, and governments' political orientation and residual state ownership interfere with investment decisions. To control for potential endogeneity of the key institutional variables, they draw their identification strategy from the political economy literature.

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