The problem of regulatory arbitrage: A transaction cost economics perspective

Regulatory arbitrage, or the ability of financial firms to circumvent or neutralize rules, is a classic problem of financial regulation. This article draws on transaction cost economics (TCE) to reformulate this old problem, thus defining regulatory arbitrage as a contracting hazard arising from interactions between the regulator and regulated firms, given bounded rationality and opportunism. Following standard TCE, the article first characterizes the implicit regulatory contract in finance, focusing in particular on the mobile and elastic nature of regulated actors and financial assets as well as the contested utility of financial innovation. It is then argued that this incomplete and hazard-prone regulatory bargain must be matched with a governance structure that both adapts to unforeseen circumstances and avoidance strategies and copes with radical uncertainty about the welfare consequences of financial innovation. To that end, the article discusses how a governance structure here termed “relational regulation” might facilitate such ex post governance under uncertainty.     

Global nanotechnology regulatory governance from a network analysis perspective

Over the last decade, there has been a proliferation of nanotechnology regulatory initiatives, developed to ensure the responsible development of nanotechnology applications. This article examines the emergence and diffusion of environmental, health and safety (EHS) policies dealing with nanotechnology. Drawing on a citation network analysis of global nanotechnology regulatory governance, the article analyzes the role of key organizations at multiple levels and their interplay in initiating and diffusing occupational safety and health policies. It shows that private international standard‐setting organizations become “centers of information,” which play a strategic role as intermediaries that diffuse national policies globally. Through this process, these centers help to shape supranational policies. Such an understanding of the role of international private standard‐setting organizations sheds new light on the current debate over the privatization and internationalization of EHS governance.     

Private regulatory capture via harmonization: An analysis of global retailer regulatory intermediaries

Studies using the Regulatory–Intermediary–Target (RIT) framework have examined a variety of forms of regulatory capture, including how targets capture intermediaries (T?I) and how intermediaries capture regulators (I?R). Little attention has been paid to why and how regulators themselves might engage in capture. Yet such a scenario is likely in transnational governance settings characterized by regulatory competition and conflict, as well as power differentials between different types of private regulators (non‐governmental organizations, multinational corporations, and business associations). This paper elucidates why and how a private regulator might capture another private regulator via a regulatory intermediary: R1?I?R2. Drawing on interview and archival data, I examine three industry‐driven regulatory intermediaries created to harmonize private labor codes of conduct and ethical audit processes. These are founded and governed by a small group of retail trade associations and global retailers who also fulfill the role of private regulators (R1). My analysis reveals that the creation of these intermediaries is driven by global retailers’ reliance on standardization, low transaction costs, and regulatory harmonization across all aspects of their operations. It further reveals how the harmonization platforms are designed to leverage global retailers’ market power and evolve from regulatory intermediaries into de facto regulators that supplant existing private regulators (R2), and thereby capture transnational governance of consumer product supply chains. The article concludes by discussing contributions, implications, and avenues for future research.     

Orchestrating sustainability: The case of European Union biofuel governance

This article provides an empirical analysis of orchestration – that is, the initiation, support, and embracement of private governance arrangements through public regulators – in the field of European Union biofuel governance. It examines the emerging sustainability regime and shows that orchestration has been extensively practiced. Regulators in the European Union have used a range of directive and facilitative measures to initiate and support private biofuel certification schemes and to incorporate them in their regulatory frameworks. This has given rise to a hybrid regime in which public and private approaches are closely intertwined. Discussing the benefits and complications of engaging with private biofuel sustainability governance, the article's findings point to a partial failure of orchestration in this policy area.     

The effectiveness of NGO self‐regulation: theory and evidence from Africa

Non‐governmental organizations (NGOs) play an increasingly important role in public service provision and policy making in sub‐Saharan Africa, stimulating demand for new forms of regulatory oversight. In response, a number of initiatives in NGO self‐regulation have emerged. Using cross‐national data on 20 African countries, the article shows that self‐regulation in Africa falls into three types: national‐level guilds, NGO‐led clubs and voluntary codes of conduct. Each displays significant weaknesses from a regulatory policy perspective. National guilds have a broad scope, but require high administrative oversight capacity on the part of NGOs. Voluntary clubs have stronger standards but typically have much weaker coverage. Voluntary codes are the most common form of self‐regulation, but have the weakest regulatory strength. This article argues that the weakness of current attempts to improve the accountability and regulatory environment of NGOs stems in part from a mismatch between the goals of regulation and the institutional incentives embedded in the structure of most self‐regulatory regimes. The article uses the logic of collective action to illustrate the nature of this mismatch and the tradeoffs between the potential breadth and strength of various forms of NGO self‐regulation using three detailed case studies. Copyright © 2008 John Wiley & Sons, Ltd.     

Uniformity as response to soft law: Evidence from compliance and non‐compliance with the Dutch corporate governance code

The objective of the paper is to examine how firms have dealt with the trade‐off between flexibility and uncertainty that is characteristic for the decision‐making of firms in coping with self‐regulatory initiatives in general and the comply‐or‐explain principle in corporate governance in particular. Using unique data for 126 listed Dutch firms, we find that firms respond to this self‐regulatory initiative by largely complying with the code recommendation, possibly out of fear that the firm's reputation may be damaged. Furthermore, we find evidence suggesting that firms confine themselves to adopting a specific set of code recommendations and use similar arguments to explain non‐compliance. Our findings indicate uniformity in adopting the standard of good governance which is not in line with the logic of corporate governance codes and casts doubt on the effectiveness of this form of soft law. Overall, the paper's findings indicate that more restrictive (regulatory) instruments may be necessary to make firms conform to the spirit of codes.     

It runs in the family: Meta-regulation and its siblings

Regulators in different countries and domains experiment with regulatory tools that allow organizations to adapt regulation to their individual circumstances, while holding them accountable for their self-regulation systems. Several labels have been coined for this type of regulation, including systems-based regulation, enforced self-regulation, management-based regulation, principles-based regulation, and meta-regulation. In this article, these forms of regulatory governance are classified as belonging to one family of “process-oriented regulation.” Based on a review of diverse empirical and theoretical research, it is suggested that the family of process-oriented regulation tends to have a positive, albeit varied, impact on organizations' performance, and the factors that shape this inconsistent effect are analyzed. Building on aspects of Parker's normative construct of “meta-regulation,” the article explores the extent to which her innovative notion of a learning-oriented approach to regulation might overcome some of the weaknesses of prevalent process-oriented approaches. It is proposed that under conditions of regulatory uncertainty or entrenched and prevalent non-compliance or both, meta-regulation is likely to have many advantages over other forms of process-oriented regulation. Yet realizing these advantages requires a rare combination of high regulatory capacity, a stable regulatory agenda, and a supportive political environment.     

The rewards of cooperation: The effects of membership in European regulatory networks

Networks famously epitomize the shift from ‘government’ to ‘governance’ as governing structures for exercising control and coordination besides hierarchies and markets. Their distinctive features are their horizontality, the interdependence among member actors and an interactive decision‐making style. Networks are expected to increase the problem‐solving capacity of political systems in a context of growing social complexity, where political authority is increasingly fragmented across territorial and functional levels. However, very little attention has been given so far to another crucial implication of network governance – that is, the effects of networks on their members. To explore this important question, this article examines the effects of membership in European regulatory networks on two crucial attributes of member agencies, which are in charge of regulating finance, energy, telecommunications and competition: organisational growth and their regulatory powers. Panel analysis applied to data on 118 agencies during a ten‐year period and semi‐structured interviews provide mixed support regarding the expectation of organisational growth while strongly confirming the positive effect of networks on the increase of the regulatory powers attributed to member agencies.     

The Regulation Dilemma: Cooperation and Conflict in Environmental Governance

Across the United States and around the world, businesses have joined voluntary governmental and nongovernmental environmental regulations. Such codes often require firms to establish internal environmental management systems to improve their environmental performance and regulatory compliance. Meanwhile, governments have been offering incentives to businesses that self-police their regulatory compliance and promptly report and correct violations. This article examines how governmental regulatory enforcement can influence firms' compliance with mandatory and voluntary regulations. Cooperative regulatory enforcement—in which firms self-police their environmental operations and governments provide regulatory relief for voluntarily disclosed violations—yields optimal win–win outcomes, but only when both sides cooperate. If firms are likely to evade compliance, governments are better off adopting a deterrence approach. If governments insist on rigidly interpreting and enforcing laws, firms may have incentives to evade regulations and not voluntary codes. Cooperation is possible through credible signals between firms and government.     

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.     

Risk Analysis of Nanomaterials: Exposing Nanotechnology's Naked Emperor

Risk analysis (encompassing risk assessment, management, and communication) is touted internationally as the most appropriate approach for governing nanomaterials. In this article, we survey existing criticisms of risk assessment as a basis for regulatory decision making on emerging technologies, particularly highlighting its exclusion of key societal dimensions, its epistemological underdetermination, and its lack of democratic accountability. We then review the specific case of nanomaterials and identify six major barriers to the effective operation of both risk assessment and risk management. These include a lack of: nano‐specific regulatory requirements, shared definitions, validated and accessible methods for safety testing, available scientific knowledge, reliable information on commercial use, and capacity for exposure mitigation. Finding the knowledge, standards, methods, tools, definitions, capacity, and political commitment all insufficient, we argue that risk analysis is a “naked emperor” for nanomaterial governance. We therefore suggest that additional concepts and approaches are essential for nanomaterials policy and regulation.     

Risk and Financial Armageddon in Ireland: The Politics of the Galway Tent

This article examines Ireland's financial crisis. Thus far explanation has focused on individual or collective administrative failure: the office(r) of financial regulation singularly failed to scrutinise the banks sufficiently: it was a matter of poor risk management. While this article would agree that the (mis)management of risk was important to how the crisis unfolded, I argue that an explanation of why the crisis emerged demands an altogether different focus. Put simply, after financial regulatory reform, a reconfiguration of risk in politics took place as the locus of decision‐making about financial risk shifted from the realm of the political/legal (Cabinet/Central Bank/Department of Finance) to the economic/legal (retail banks, shareholders/consumers). It was a critical development, one that mirrored events taking place in the UK, upon which Ireland drew experience, for now assessments about risk undertaken by the banks demanded that intervention could be justified only on an ascertainable risk, not a theoretical uncertainty (or spurious fear). The evidentiary bar for intervention was therefore raised, removing the precautionary instinct implicit in the prudential governance of Central Banks.     

The regulatory style of environmental governance in China: the case of EIA regulation in Shanghai*

The body of literature that examines how institutional contexts affect environmental governance in advanced industrial countries finds that style of environmental regulation is country‐specific. In the pluralist form of democracy like the United States, environmental policy formulation involves bargaining and compromises among interest groups and regulation enforcement through relatively formal and legalistic means. In the corporatist form of democracy like Sweden and Great Britain, in contrast, environmental policies are more accommodating to divergent societal interests and tend to be less formal in their enforcement. These variations in regulatory style have been attributed to differences in basic constitutional structures, regime types and cultures. How do institutional contexts affect the style of environmental regulation in China, which is both a non‐democratic and developing country? This article examines China's regulatory style by focusing on environmental impact assessment (EIA) regulation in Shanghai. The Shanghai EIA system is analyzed in terms of policy ideology, policy content, regulatory process, public participation and policy consequences. It is shown that China's being a single‐party regime with a ‘rule of persons’ tradition has heavily shaped its environmental governance. Based on Shanghai experience, China's style can be characterized as formal in requirement, agency‐dominated in the regulatory process, legalistic in enforcement, and informal politics as the substance of regulation. Copyright © 2000 John Wiley & Sons, Ltd.     

Emerging technologies and problem definition uncertainty: The case of cybersecurity

For governments to regulate, they must first define the problem and decide which policymakers have the authority to make decisions. Technological development can disrupt the authority-allocation process by fostering uncertainty about which actors are responsible for making policy. This article examines the role that changing technology has played in the development of cybersecurity policy in the United States. New technologies have increased the type and scope of assets vulnerable to cyberthreats, and with them the number of governing units who can claim jurisdiction over cybersecurity-related issues. Uncertainty about the nature of the problem has led the U.S. Congress to rely heavily on bureaucratic witnesses and focus on how existing regulations can be brought to bear. Emerging technologies create regulatory challenges for governance not only through unforeseen consequences but through uncertainty over who can regulate. Fragmented authority can produce piecemeal responses and a reliance on existing frameworks that benefit regulated industries.     

Assessing the institutionalization of private sustainability governance in a changing coffee sector

The potential of transnational private governance initiatives to constitute effective alternatives to state‐led regulation of global value chains rests on their ability to scale up and become institutionalized in a given sector. This study examines whether such institutionalization has occurred in the coffee sector, the commodity with the most widespread adoption of certified products and over 30 years’ experience of private governance, and tests hypotheses on facilitating and inhibiting conditions. It finds that while norm generation around responsible supply chain management and the organizational institutionalization of standard‐setting bodies is well advanced, the practice of internalizing social and environmental externalities through the routinized production and purchase of higher priced certified goods continues to be questioned by industry actors. Indeed, conditions that favored normative and organizational institutionalization, such as high levels of industry concentration, product differentiation, and deliberative interaction, are shown to represent barriers to the practice‐oriented institutionalization of market‐driven regulatory governance.     

Regulatory dynamism of environmental mobilization in urban China

In China, urban middle class mobilization against potential pollution risk has become increasingly common. This article examines this phenomenon through a detailed case study of a 2009 anti‐waste incinerator campaign in the Panyu District of Guangzhou, which culminated in a sizeable public protest and government U‐turn. This episode revealed tension between the narrow, state‐centered regulatory model fixated on end‐of‐pipe pollution control, and a much broader decentered approach advocated – and practiced – by project opponents, which incorporated public consultation and much greater emphasis on upstream waste reduction and sorting. In the process, the Panyu campaign progressed beyond a case of “regulation by escalation,” whereby beneficial regulations are belatedly enforced following populist pressure. Instead, it transformed into an open dialogue between a plurality of actors, including citizens, journalists, experts, and officials, about what regulation should constitute and who should determine acceptable levels of risk. By focusing on the processes through which regulatory issues emerged and changed during the Panyu campaign, this article highlights the regulatory dynamism of environmental mobilization in a context of regulatory uncertainty, and campaigns against “locally unwanted land uses” more broadly.     

Jurisgenerative role of auditors in transnational labor governance

This article builds on the model of regulatory intermediaries by incorporating insights from the field of legal hermeneutics about the process through which the meaning of a legal rule emerges. It describes how intermediaries can take on a jurisgenerative role in the development of legal rules through their interpretation of legal rules. This role is demonstrated through an analysis of social audits from Chinese and Vietnamese factories involved in the Fair Labor Association (FLA). The analysis illustrates how the integration of fundamental labor rights into the FLA's private Code of Conduct requires auditors to develop new interpretations of the Freedom of Association as a result of uncertainties and contradictions between legal requirements at various levels, as well as with the FLA's own rules. Through this empirical analysis, the article contributes to the literature by identifying regulatory intermediaries’ jurisgenerative capacities when they monitor fundamental labor rights referenced by private governance instruments. It further highlights why legal and regulatory governance scholars need to consider the transformative effects that transnational private labor governance may have on international labor law.     

Fragmented or cohesive transnational private regulation of sustainability standards? A comparative study

Literature on private regulation recognizes the proliferation of competing regulatory organizations and approaches in various industries. Studies analyzing why fragmentation arises so far focus on single‐case studies, the exploration of single variables, or variation in types of fragmentation. This article analyzes why in certain industries and for certain issues regulatory organizations proliferate, while in others a single regulatory organization emerges which covers the entire industry. Through a comparative case study of private regulation of sustainability standards in the forestry, clothing, IT‐electronics, and chemicals industries, we show how a combination of low industrial concentration, civil society involvement in governance, and stringent standards of a first‐moving regulator offer the strongest explanation for a fragmented private regulatory field, while high industrial concentration, business‐driven governance, and lenient standards of a first‐moving regulator lead to cohesive regulation.     

Codes in context: How states,markets, and civil society shape adherence to global labor standards

Transnational business regulation is increasingly implemented through private voluntary programs – such as certification regimes and codes of conduct – that diffuse global standards. However, little is known about the conditions under which companies adhere to these standards. We conduct one of the first large‐scale comparative studies to determine which international, domestic, civil society, and market institutions promote supply chain factories' adherence to the global labor standards embodied in codes of conduct imposed by multinational buyers. We find that suppliers are more likely to adhere when they are embedded in states that participate actively in the International Labour Organization treaty regime and that have stringent domestic labor law and high levels of press freedom. We further demonstrate that suppliers perform better when they serve buyers located in countries where consumers are wealthy and socially conscious. These findings suggest the importance of overlapping state, civil society, and market governance regimes to meaningful transnational regulation.     

Is experimentalist governance self-limiting or self-reinforcing? Strategic uncertainty and recursive rulemaking in European Union electricity regulation

Is experimentalist governance (XG) self-limiting or self-reinforcing by virtue of its relationship to strategic uncertainty as an essential scope condition? This article tackles this important but understudied question by elaborating a series of idealtypical pathways for the temporal evolution of XG in specific policy domains, ranging from reversion to hierarchical governance through endogenous reduction of strategic uncertainty at one extreme to institutionalization of experimentalism as a multipurpose governance architecture at the other. It then goes on to test the empirical validity of these contrasting theoretical expectations about the long-term relationship between XG and strategic uncertainty through a process-tracing analysis of electricity regulation in the European Union over a series of policy cycles since the 1990s. Building on and extending previous research in this domain, this article's findings strengthen empirical confidence in the theoretical expectation that XG is self-reinforcing, while diminishing confidence in the claim that it is self-limiting.