When Governments Regulate Governments

This article advances a political theory of regulation that accounts for the choices of regulators and regulated entities when both are governments. Leading theories of regulation assume that governments regulate profit‐maximizing firms: Governments set rules, to which firms respond rationally in ways that constrain their behavior. But often the entities that governments regulate are other governments. We argue that government agencies and private firms often face different compliance costs, and that agencies have greater incentives than firms to appeal regulations through political channels. Simultaneously, the typical enforcement instruments that regulators use to influence firm behavior may be less effective against governments. Our empirical subjects are public and private entities’ compliance with the U.S. Clean Air Act and Safe Drinking Water Act. We find that, compared with private firms, governments violate these laws significantly more frequently and are less likely to be penalized for violations.     

The dark side of price cap regulation: a laboratory experiment

In a nutshell, price cap regulation is meant to establish a quid pro quo: regulators are obliged by law to intervene only at rare, previously defined points in time, and only by imposing an upper bound on prices; firms are meant to justify regulatory restraint by adopting socially beneficial innovations. In the policy debate, a potential downside of the arrangement has featured less prominently: the economic environment is unlikely to be stable while the cap is in place. If regulators take this into account, they have to decide under uncertainty and also anticipate how regulated firms will react. In a lab experiment, we manipulate the degree of regulatory uncertainty. We compare a baseline when regulators have the same information as firms about demand with treatments wherein they receive only a noisy signal and another when they know only the distribution from which demand realizations are taken. In the face of uncertainty, regulators impose overly generous price caps, which firms exploit. In the experiment, the social damage is severe, and does not disappear with experience.     

Big field,small potatoes: An empirical assessment of EPA's self‐audit policy

Environmental self‐auditing is said to deserve and require encouragement. Although firms can audit themselves more cheaply and effectively than regulators, they are deterred for fear that information they uncover will be used against them. To reduce this disincentive, the Environmental Protection Agency's (EPA's) Audit Policy lowers punitive fines when firms promptly disclose and correct self‐discovered violations. While some contend that the Audit Policy is inadequate, EPA touts its success based on the policy's track record. Our examination of that track record leads us to question EPA's claim. Comparing the violations in these cases with those detected by standard EPA enforcement suggests that the typical self‐audited violation is relatively minor. Cases arising under the Policy are more likely to concern reporting violations and less likely to concern emissions. The relative insignificance of self‐audited violations raises a number of policy questions, including whether the Audit Policy should be revised to play a larger role in enforcement. © 2004 by the Association for Public Policy Analysis and Management.     

Capturing the Moment? Crisis,Market Accountability,and the Limits of Legitimation

This article extends the concept of regulatory capture to a prominent element of responses to the 2007–2008 global financial crisis overlooked in political science: the out-of-court settlements undertaken between regulators and financial firms. In outsourcing accountability to markets and diverging from previous crisis responses, these billion dollar agreements have remained highly controversial. How have financial regulators sought to legitimate this novel approach to post-crisis accountability? Contrasting material and cognitive conceptions of regulatory capture, I illustrate how American financial regulators have persistently prioritized market values in self-legitimating post-crisis financial accountability. Inconsistencies in the stress on transparency and growth, however, are shown to undermine the wider legitimation of this market-based approach. These limits underpin the scepticism with which post-crisis settlements have been received, as well as to the broader sense that accountability for the most severe period of volatility since the Great Depression has remained lacking.     

Judicious Incentives: International Public Policy Responses to the Globalization of Environmental Management

Public policymakers and regulators worldwide are grappling with the desire to improve environmental quality through appropriate regulation of business, while also streamlining government. Concurrently, environmentally conscience consumers are calling for improved environmental performance by industry. As a result of these pressures, regulators and lawmakers worldwide are attempting to craft effective policies that create adequate incentives for environmental protection on the part of firms, in the face of decreasing budgets and an increased demand for the use of market‐based incentives. To aid decision makers as they struggle with these concerns, this study provides a detailed case examination of the dilemmas and responses of national‐level regulators as they try to develop appropriate responses to the rise of international and “voluntary” management regimes. To accomplish these goals, this article compares the public policy responses of governments around the world to one such voluntary international environmental regime: ISO 14001. ISO 14001 is a form of industry self‐regulation in response to market forces calling for harmonization in environmental management and as a result of consumer and trade‐partner demands. This study examines the relationships between regulators and the regulated in order to understand if ISO 14001 certified firms are receiving regulatory relief or other forms of public policy/regulatory benefits as a result of their certification. It will also examine the impact that government incentives (or their absence) are having on the certification decisions of firms around the world. This information helps us to begin to understand how the trends toward smaller government and voluntary environmental regimes are affecting one another.     

Rent-seeking with multiple winners

This paper examines the impact of the number of winners allowed by regulators on rentseeking expenditures. It is demonstrated in a widely used model that an increase in the number of winners will decrease total rent-seeking expenditures. This result is generally obtained regardless of whether the firms are risk-averse or risk-lovers. When regulators award coveted market franchises, there will be smaller welfare losses if more winners are allowed.I am grateful to an anonymous referee whose comments were very helpful. The usual caveats apply.     

Introduction to Neumann: law and socialist political theory

Abstract

Regulators attempt to understand financial markets and their risks in terms of categories of knowledge and datasets that are defined and produced by the markets. However, regulators cannot adequately interpret or utilize such knowledge, for reasons including their social distance from the sites of knowledge production, the diversity of financial firms’ proprietary risk models, firms’ abilities to game the rules thus rendering the ‘metrics’ meaningless and several backfiring aspects of global regulatory networking and reform. Calls for yet more information about trading, posed in terms of the merits of transparency, result in information swamping of regulators. Meanwhile, while policy-makers tinker with regulatory structures (‘architecture’), political reaction to the crisis de-legitimizes public regulation as a project. Yet there is one positive aspect of the reforms – enhancing powers for ‘resolution’ of financial firms in ways that impact upon investors while minimizing wider destabilization – upon which the regulatory information requirement can and should be refocused. To protect the public interest, legal transparency is required, trading transparency is not. This paper introduces these issues by drawing on critical work on transparency and markets.     

Some Implications of Corporate Taxation for Rent-Seeking Activity

In this paper we show that corporate taxes are likely to have considerable implications for rent-seeking activity. We find that corporate taxation tends to significantly reduce rent-seeking, and that it favors rent-seeking by established firms and discriminates against new and zero profit firms. Indeed, we show that corporate tax regulations may completely block rent-seeking by new corporations, and that rent-seeking competitions may be characterized by an equilibrium that features a small number of profitable and well established firms. Tax regulations may therefore impart an oligopolistic tendency to rent-seeking markets. Moreover, our results may have significant implications for the effects of corporate taxes on patent races, tournaments, and other first-past-the-post competitions.     

Does an effective bankruptcy reform impact the selling cost behavior of firms? Evidence from India

This study examined whether strengthening of creditors' rights impacts the selling cost behavior of firms or not? To investigate this question, the author exploited implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 in India as an exogenous policy shock. The author found that selling cost of firms in India in the pre-implementation period were not “sticky”. Further, implementation of the IBC produced no impact on the selling cost behavior of Indian firms in the post-implementation period. Nonetheless, legislation of the IBC was found to have lowered financial resources that firms devoted to their selling activities. In addition, firms that faced a higher risk of bankruptcy because of more leverage in the pre-IBC period demonstrated greater response to promulgation of the IBC. Thus, it can be inferred that an effective bankruptcy reform has little impact on the selling cost behavior of firms but incentivizes them to devote lesser financial resources to their selling activities in order to lower their bankruptcy risk.     

What is an algorithm? Financial regulation in the era of high-frequency trading

Abstract

In response to the flash crashes and market manipulations blamed on high-frequency trading (HFT), algorithms have been brought inside the regulatory perimeter. This paper focuses on the most ambitious regulation directed at the practice: the algorithm-tagging rule in the German High-Frequency Trading Act. Fifteen interviews with stakeholders in the Act’s implementation serve to reconstruct how regulators defined an algorithm and help pose the question of to what extent regulatory definitions and data need accurately to represent financial practices to be useful. Although tentative in its findings, the research suggests that the algorithm-tagging rule may be providing valuable signals in the noise to trade surveillance officers and having virtuous effects on the cultures of trading firms. The conclusion argues that sociologists of finance should adopt a more balanced approach when evaluating regulatory technologies and heed MacKenzie’s 2005 call to open up their black boxes.     

Rent-seeking and the behavior of regulators: An empirical analysis

The main contribution of this paper is to describe empirically how the rent-seeking process takes place in a regulated industry through the consistency in Board decisions. Evidence provided by discrete-choice decision models of regulators confirms that the conventional rent-seeking view of regulation is correct, namely to distribute wealth between various groups differently from what market forces would do. First of all, the structure of the rent-seeking activities in the Quebec regulated trucking industry is well explained. There exist behavioral uniformities (Russell and Shelton, 1974) in decisions taken by the Quebec Transport Commission, given its wide range of choice provided by the absence of detailed regulatory standards by the Quebec legislature. Secondly, trucking firms and large shippers are the interest groups seeking to extract artificially contrived rents. The capture theory of regulation is not a dominant political strategy and therefore does not analytically explain various trades taking place among interest groups when a permit authority is requested. So logrolling by regulators is clearly essential to maintain their non-transferable investment of time and talent and protect their political afterlife. Thirdly, large firms are more successful, at the margin, than small firms in their expansion because of their political effectiveness. The regulatory agency gives more rents to those who offer relatively strong electoral support to its party. Finally, appointed regulators do not achieve other positive payoffs from the regulatory process than those which may result from the agency problem. So the regulatory agency does not promote its own policy agenda, but rather that of the elected politicians, given the organizational and control problem between these two.I am indebted to the Social Sciences and Humanities Research Council of Canada for its financial support, to Gérard Bélanger, Jean-Luc Migué for helpful comments and to Sylvain Veillette, Pascal Migué, Marc Leduc for valuable research assistance. I benefitted from useful comments by the editor of this journal. All the remaining errors are mine.     

Institutionen, Interessen, Netzwerke Unternehmensverflechtung im internationalen Vergleich

In many countries large companies are connected to one another by corporate networks. This analysis presents the analysis of network structures in six countries: Germany, France, Great Britain, Netherlands, Switzerland, and the United States. Networks form part of an institutional structure of the market whose aim is to reduce transaction costs. Networks enable firms to coordinate their behavior and regulate competition. Corporate networks can be compared with interest organizations (e.g., corporatism). They serve to improve the collective capacity of firms for self-regulation. The more comprehensive the networks and the more effective the mechanisms by which interests are filtered, the less their scope to organize narrow sectional interests. The structure of corporate networks is different in different countries. In Germany and Switzerland, for instance, large firms and banks come together in the networks (Konzerne); in France the large companies, the state and the financial companies. The predominant network configuration is influenced in each country by its specific culture, traditions and experience.     

Regulation under uncertainty: The coevolution of industry and regulation

As production and design disintegrate and become more collaborative, involving dynamic relations between customers and firms supplying complex subsystems and service, products and production methods become more innovative but also more hazardous. The inadvertent co‐production of latent hazards by independent firms is forcing firms and regulators to address the problem of uncertainty – the inability to anticipate, much less assign a probability to future states of the world – more directly than before. Under uncertainty, neither the regulator nor the regulated firms know what needs to be done. The regulator must induce firms to systematically canvas their practices and identify potential hazards. But recognizing the fallibility of all such efforts, the regulator must further foster the institutionalization of incident or event reporting procedures: systems to register failures in products or production processes that could be precursors to catastrophe; to trace out and correct their root causes; to alert others in similar situations to the potential hazard; and to make certain that countermeasures to ensure the safety of current operations are taken and the design requirements for the next generation of the implicated components or installations are updated accordingly. In this essay we develop these arguments and look closely at changes in the Norwegian offshore oil and gas industry and its regulator, the Petroleum Safety Authority to better understand the coevolution of vertically disintegrated industry and new forms of regulation.     

Environmental management and street-level regulators: A cultural trap?

It has been argued that environmental management is in an administrative trap. Numerous factors leading to this trapped situation have already been identified in the literature: institutional rigidity, lack of co-ordination, formalization, non-accountability and political interference. This study focusses on the organizational, cultural dimension of the administrative trap and argues that in order to reform administrative structures, the organizational culture must also be reformed. On the basis of several face-to-face interviews with street-level environmental regulators in Hong Kong, the study claims that a role-oriented, hierarchical culture exists. While such an organizational culture is in perfect agreement with existing administrative arrangements, it may, in the end, hamper the effectiveness of environmental management.     

Deliberative Democracy and International Labor Standards

Political theorists have argued that the methods of deliberative democracy can help to meet challenges such as legitimacy, effective governance, and citizen education in local and national contexts. These basic insights can also be applied to problems of international governance such as the formulation, implementation, and monitoring of labor standards. A participatory and deliberative democratic approach to labor standards would push the labor–standards debate into the global public sphere. It would seek to create broad discussion about labor standards that would include not only firms and regulators, but also consumers, nongovernmental organizations, journalists, and others. This discussion could potentially improve (1) the quality of labor standards by incorporating considerations of economic context and firm capability, (2) their implementation by bringing to bear not only state sanctions but also political and market pressures, and (3) the education and understanding of citizens. Whereas the role of public agencies in state–centered approaches is to formulate and enforce labor standards, central authorities in the decentralized–deliberative approach would foster the transparency of workplace practices to spur an inclusive, broad, public conversation about labor standards. To the extent that a substantive consensus around acceptable behavior emerges from that conversation, public power should also enforce those minimum standards.     

Rent-seeking in the deregulatory environment: State telecommunications

Proponents of rent-seeking theories argue that firms pressure and reward politicians and bureaucrats to pursue favorable policies so they can achieve higher than normal, market returns. In an era of deregulation, often with long transition periods toward unregulated competition, how do firms develop specific political strategies to achieve success in rent-seeking? Deregulation of telecommunications at the state level allows comparison of the strategies of the seven firms created in the AT&T divestiture in more than one political jurisdiction. One firm, U S West, has pursued the most aggresive political strategy. This paper argues that U S West executives correctly perceived that the political environment in which they operated differed greatly from that in the rest of the country and that a different deregulatory strategy was appropriate. The firm exploited institutional differences by bypassing state regulators and going directly to state legislators to get favorable policies.     

Federalism, Preemption, and Implementation of the 1996 Telecommunications Act

This essay provides a positive analysis of regulatory federalismin the dynamic telecommunications industry since the 1996 federalTelecommunications Act. While the 1996 legislation clarifiedsome contentious issues, and established a framework for resolvingothers, implementation by the FCC has not been as smooth asmany participants originally assumed. State regulators havecontinued to play an important role in the industry, which courtdecisions have often upheld. As some jurisdictional issues doget resolved, others that were not anticipated in the legislationare emerging, largely related to regulation of Internet services.     

Establishing Legitimacy in Emerging Markets: An Empirical Comparison of the Warsaw, Budapest, and Prague Stock Exchanges

The purpose of this analysis is to investigate the influence of economic and sociological institutional constraints in determining the legitimacy of firms. This study specifically looks at the importance of regulatory and transnational institutional constraints for firms traded on the Warsaw, Budapest, and Prague stock exchanges. The results indicate that a well-regulated securities environment has a direct impact on the ability of firms to establish organizational legitimacy. We also find that, lacking local regulation, firms can increase their legitimacy by adopting international accounting standards. Thus, we find support for the assertion that both economic and sociological solutions to the problem of legitimacy are appropriate for firms operating in an emerging market.     

The politics of requesting: Strategic behavior and public utility regulation

Extant models of public utility regulation assume that regulated firms make the same rate adjustment requests regardless of the political environment they will face during the rate case. Focusing on information asymmetries, the repeated interaction between the firm and the regulatory commission, and behavioral assumptions about the goals of regulators, a new model is proposed that assumes firms strategically and rationally plan their requests to respond to political and agency, as well as standard economic factors. An implication of the new model is that the effect of political factors, such as grassroots advocacy and regulator election, should be observed in request equations rather than in award equations where they are traditionally sought. This new model is tested using data from 54 telephone rate cases. The results indicate that firms do respond strategically to political factors (especially to regulator elections), and also to agency factors (such as workload), by increasing their requests. This partially explains a puzzling result in the literature and has implications for regulatory policy, interest group behavior, democratic institutions, and public management.