INDEPENDENT AGENCIES, POLITICAL INTERFERENCE, AND FIRM INVESTMENT: EVIDENCE FROM THE EUROPEAN UNION

Abstract

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)

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