Responsive Regulation: Transcending the Deregulation Debate

Ian Ayres and John Braithwaite

Oxford University Press (1992)

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This book is about the need to transcend the intellectual stalemate between those who favor strong state regulation of business and those who advocate deregulation. It is a debate that has been rerun so many times that to open it up in an audience of regulatory policy makers today is to put them immediately to sleep. The practitioners yawn because they know that in reality regulation occurs in "many rooms". A free market can mean that private regulation by cartels will defeat competition; detailed state regulation can be a symbolic exercise that is readily side-stepped by minor realignment of the market.

Practical people who are concerned with outcomes seek to understand the intricacies of interplays between state regulation and private orderings. The empirical foundation for their analysis of what is good regulatory policy is acceptance of the inevitability of some sort of symbiosis between state regulation and self-regulation. This is true of the most basic commercial legal forms:

The drafting of the Uniform Commercial Code was a self-conscious attempt (by Karl Llewellyn) to synthesize formal law and commercial usage: the formal law would incorporate the best commercial practice and would in turn serve as a model for the refinement and development of that practice. The Code's broadly drafted rules would be accessible to businessmen and would provide a framework for self-regulation which would in turn furnish attentive courts with content for the Code's categories. Thus the Code would serve as a vehicle for business communities to evolve law for themselves in dialogue with the courts, operating not as interpreters of imposed law but as articulators and critics of business usage.

Good policy analysis is not about choosing between the free market and government regulation. Nor is it simply deciding what the law should proscribe. If we accept that sound policy analysis is about understanding private regulation - by industry associations, by firms, by peers, and by individual consciences - and how it is interdependent with state regulation, then interesting possibilities open up to steer the mix of private and public regulation. It is this mix, this interplay, that works to assist or impede solution of the policy problem. Participants on both sides frame the deregulation debate as a kind of "Live Free or Die" policy choice. Even lovers of liberty might reasonably ask whether third alternatives do not exist. This book is about proposing such alternatives. We argue that by working more creatively with the interplay between private and public regulation, government and citizens can design better policy solutions.

In this chapter we have three objectives. In the first section, we sketch the notion of responsive regulation. We introduce the specific policy proposals of the following chapters and connect these policies to the thrust of our metaregulatory theory. The second section argues for the book's contemporary relevance. Far from the perception that we live in an era of vast deregulation, we argue that administrative and regulatory practice is in a state of flux in which responsive regulatory innovations are politically feasible. Finally, in the third section, we place our theories of responsive regulation within a republican tradition that is distinct from political theories of (neo-) corporatism, liberalism, or pluralism.

The Idea of Responsive Regulation

Responsive regulation is distinguished (from other strategies of market governance) both in what triggers a regulatory response and what the regulatory response will be. We suggest that regulation be responsive to industry structure in that different structures will be conducive to different degrees and forms of regulation. Government should also be attuned to the differing motivations of regulated actors. Efficacious regulation should speak to the diverse objectives of regulated firms, industry associations, and individuals within them. Regulations themselves can affect structure (e.g., the number of forms in the industry) and can affect motivations of the regulated.

We also conceive that regulation should respond to industry conduct, to how effectively industry is making private regulation work. The very behavior of an industry or the firms therein should channel the regulatory strategy to greater or lesser degrees of government intervention.

Most distinctively, responsiveness implies not only a new view of what triggers regulatory intervention, but leads us to innovative notions of what the response should be. Public regulation can promote private market governance through enlightened delegations of regulatory functions. In the next three chapters, we argue in a broad variety of contexts that public policy can effectively delegate government regulation of the marketplace to public interest groups (Chapter 3), to unregulated competitors of the regulated firms (Chapter 5), and even to the regulated firms themselves (Chapter 4).

Such delegation should be neither wholesale nor unconditional. Moreover, one of the things that can be delegated is the monitoring of other delegations. Central to our notion of responsiveness is the idea that escalating forms of government intervention will reinforce and help constitute less intrusive and delegated forms of market regulation. In Chapter 2 we introduce the concept of an enforcement pyramid that we argue can be implemented in multiple ways to the same effect. By credibly asserting a willingness to regulate more intrusively, responsive regulation can channel marketplace transactions to less intrusive and less centralized forms of government intervention. Escalating forms of responsive regulation can thereby retain many of the benefits of laissez-faire governance without abdicating government's responsibility to correct market failure.

Responsive regulation is not a clearly defined program or a set of prescriptions concerning the best way to regulate. On the contrary, the best strategy is shown to depend on context, regulatory culture, and history. Responsiveness is rather an attitude that enables the blossoming of a wide variety of regulatory approaches, only some of which are canvased here. Although our ideas for responsive regulation bear many of the marks of Nonet and Selznick's (1978) "responsive law" concept - flexibility, a purposive focus on competence, participatory citizenship, negotiation - we are skeptical about repressive, autonomous, and responsive law being evolutionary stages in legal development. Indeed Nonet and Selznick themselves are careful to limit their claims that responsive law is a developmental response to the stresses inherent in the functioning of autonomous law. Our attempt to sensitize readers to innovative regulatory possibilities thrown up by thinking responsively is devoid of any grand theoretical aspirations.

The attitude of responsiveness is very similar to the attitude of interactiveness that Sigler and Murphy advocate in Interactive Corporate Compliance, although there are important difference in the models we develop from those of Sigler and Murphy. Responsiveness, like interactiveness, is not one of those notions such that if two people know what responsiveness is, they will come up with the same solution for the responsive regulator to implement in a particular situation. An attitude of responsiveness does generate different policy ideas that do transcend the divide between regulatory and deregulatory solutions. But for the responsive regulator, there are no optimal or best regulatory solutions, just solutions that respond better than others to the plural configurations of support and opposition that exist at a particular moment in history.

With this as an introduction, let us review more specifically the key policy ideas of this book. Chapters 2 to 4 develop four separate and rather different ideas for making regulation responsive. They are designed as self-contained chapters so readers can approach the book by dipping into just one of them. However, the reader who takes in the whole book will find that some of the problems left unsolved by the idea in one chapter will be addressed by the idea in another. Although some reference is made to these connections within each chapter, they are more fully drawn together in Chapter 6. Each chapter represents a different exemplification of how to think responsively. None represents an idea that is conceived as universally applicable; responsiveness, after all, implies that there are no universal solutions.

Chapter 2 seeks to solve the policy problem that regulatory styles which are cooperative on the one hand or punitive on the other "may operate at cross-purposes because the strategies fit uneasily with each other as a result of conflicting imperatives." It is contended that both an economic analysis converge on the need to avoid policies of consistent reliance on either punishment or persuasion as the means of securing regulatory objectives. From both analytical viewpoints, tit-for-tat is the strategy of mixing punishment and persuasion that is most likely to be effective. Tit-for-tat is a regulatory strategy that is provokable but forgiving.

Furthermore, it is contended that the achievement of regulatory objectives is more likely when agencies display both a hierarchy of sanctions and a hierarchy of regulatory strategies of varying degrees of interventionism. The regulatory design requirement we describe is for agencies to display two enforcement pyramids with a range of interventions of every-increasing intrusiveness (matched by ever-decreasing frequency of use). Regulators will do best by indicating a willingness to escalate intervention up those pyramids or to deregulate down the pyramids in response to the industry's performance in securing regulatory objectives.

Finally, it is argued that the greater the heights of tough enforcement to which the agency can escalate (at the apex of its enforcement pyramid), the more effective the agency will be at securing compliance and the less likely that it will have to resort to tough enforcement. Regulatory agencies will be able to speak more softly when they are perceived as carrying big sticks.

Chapter 3 addresses the problem that policies that secure the advantages of an evolution of cooperation between regulatory agencies and industry are policies that also run the risk of an evolution of capture and corruption. Tripartism - empowering citizen associations - is advanced as a way of solving this dilemma. We develop a game-theoretic model of regulatory capture in which firms lobby to win the hearts and minds of agencies. We distinguish between three different forms of capture that have sharply different welfare consequences. In some circumstances, tripartism can foster a form of welfare-enhancing capture without forfeiting the agency's role in protecting the public interest. Again, there is convergence between an economic analysis of capture and a social analysis concerned with citizen empowerment. A case is made that a republican regulatory tripartism may facilitate the attainment of regulatory goals, prevent corruption, prevent harmful capture, encourage certain forms of capture that we find to be beneficial, and nurture democracy.

Chapter 4 illustrates one of the creative options available to escalate the interventionism of regulatory strategy to a middle path between self-regulation and command and control government regulation. This option is enforced self-regulation. It means that firms are required to write their own set of corporate rules, which are then publicly ratified. And when there is a failure of private enforcement of these privately written (and publicly ratified) rules, the rules are then publicly enforced.

The thesis of Chapter 5 is that in some regulatory settings, regulating only an individual firm (or a subset of the firms) in an industry can promote efficiency by avoiding the costs associated with industry-wide intervention or laissez-faire. The existence of a single (or a few) competitive firm can have a dramatic effect on the competitive conduct and performance of an entire industry. Indeed, the willingness of concentrated private consumers to subsidize second sources of competition among their suppliers provides strong empirical support for government intervention on behalf of more diffuse consumers.

Far from denying the powerful effect of competition, partial-industry regulation uses the spur of competition to affect the unregulated portion of the market. But unlike across-the-board industry regulation, if government decisions go awry, the mistakes do not need to affect adversely the unregulated firms. Instead of completely displacing the market, partial-industry regulation creates a system of "checks and balances" between the two regulatory extremes. The regulated portion of the industry mitigates the prospect of private collusion. And the unregulated portion of the industry mitigates the risk that captured or benighted regulation will harm the public.

In advancing these ideas we rely heavily on illustrative material from the United States, Australia, and to a lesser extent Britain. Yet, we advance them as ideas that might b given life in any country, although of course, the institutional embodiment of the ideas would be radically different in other cultures. Indeed, one of our fondest hopes for this book is that some might read it in the Soviet Union and Eastern Europe. As these nations address their problems of paralyzing overregulation, it seems to us they do not fall prey to a jingoistic libertarianism that seeks to sweep away all regulation as automatically bad. Although Eastern Europe and the Soviet Republics need a large dose of deregulation, they also need to create new regulatory orders almost from the ground up if their new market economies are to work and survive - securities regulation, antitrust, environmental, and consumer protection enforcement. It seems to us an important task to persuade the newly emerging consumer and environmental movements of Eastern Europe to press for responsive processes of deregulation and regulation.

In the next section, we argue that in today's environment of regulatory flux responsive regulatory strategies are politically feasible. We show that a number of the responsive strategies that we propose have already been put in place in a variety of contexts. To that extent we provide the beginnings of a theoretical justification for these nascent applications of responsive regulation and normatively argue for their proliferation.

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