Behind the Revolving Door: A New View of Public Utility Regulation

Abstract

Regulatory officials frequently work for firms they regulate after they leave office. This revolving door has been the subject of much scrutiny owing to the natural suspicion of corruption. In a time-dependent supergame, I take a strategic look behind the revolving door and find it can lead to improved performance of regulated industries. When firm managers and regulators have finite and concurrent terms, investment incentives are minimal. Staggered terms and revolving doors can result in improved performance of regulated firms when each side's actions at each date are contingent on past outcomes.