Can regulators be as irrational as the rest of us?

Behavioural economics argues that consumers often reach illogical decisions, rather than always acting in their own interests. They are not the only ones. Perhaps regulators can be guilty of this as well.

A paper by James Cooper of George Mason University School of Law and William Kovacic from the George Washington University Law School considers how psychological biases can affect decision making among regulators. Although published in 2012, it still feels relevant.

The paper does not deal with the mobile industry specifically but considers the following scenario, which will sound familiar to many telecoms firms:

“The regulator chooses a policy that accounts for the rewards she receives from the political overseer—whose optimal policy is assumed to maximize short-run outputs that garner political support, rather than long-term welfare outcomes—and the weight the regulator puts on the optimal long-run policy”.

Sounds rather like an auction design that attempts to maximise short-term gains at the expense of the more gradual, long-term benefits of lower mobile prices, doesn’t it? Countries including Thailand and India (until recently) have long insisted on high reserve prices even when it’s pretty clear they are counter-productive.

Perhaps it is the companies bidding in auctions who are being irrational. In Italy, they spent €6.5 billion on 5G-suitable spectrum last month.

“When you pay a price which is high, it is not that you are irrational, it is probably that you have some other values, some other economic incomes you are thinking about that maybe have just been hidden,” argued Antonio Nicita, the head of Italian regulator Agcom. Ultimately, any irrational bidding behaviour is likely to be limited by the market.

Cooper and Kovacic had some fixes in mind, such as encouraging adversarial reviews or incentivising officials for the long term. Or maybe, ironically, a politician needs to intervene. Look at India, where the Modi government appears to have reached a pragmatic (and presumably rational) decision that the mobile industry can no longer support sky-high prices for spectrum.•