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INDEPENDENT AGENCIES, POLITICAL INTERFERENCE, AND FIRM INVESTMENT: EVIDENCE FROM THE EUROPEAN UNION
Author(s) -
Cambini Carlo,
Rondi Laura
Publication year - 2017
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12373
Subject(s) - economics , politics , investment (military) , independence (probability theory) , liberalization , european union , international economics , capital (architecture) , quality (philosophy) , market economy , monetary economics , political science , law , philosophy , statistics , mathematics , archaeology , epistemology , history
Investment in network infrastructure is crucial for economic growth. This article studies the impact of the presence of independent regulatory agencies ( IRAs ) on the investment of European regulated firms. We account for measurement error in formal independence of IRAs by exploiting cross‐country heterogeneity in the quality of political institutions. Results show that regulatory independence increases firms' investment rate by around 1.2%–3.3%. The positive effect survives when we control for social capital accumulation, investor protection, and market liberalization. However, the effect of IRAs is not immune to politics, as we find that political interference in regulatory functions persists in the European Union and is detrimental to firm investment. ( JEL D78, L50, D92, H1)