Regulations and Governance

Lectures and Literature

geschreven door

Tijmendk

www.stuvia.nl

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Regulation & Governance

Lectures + Literature

Contents
Week 1 Introduction: What is regulation and where does it come from? ................................................ 2
Article: Majone (1997). From the positive to the regulatory state ..................................................... 3
Week 2 Theories on regulation. Standard setting. .................................................................................. 6
Article: Makkai and Braithwaite (1992), In and Out of the Revolving Door: Making Sense of
Regulatory Capture .............................................................................................................................. 8
Week 3 Compliance and enforcement. Regulatory burden. .................................................................. 12
Article: OECD (2000), Reducing the risk of policy failure ................................................................... 15
Week 4 Accountability and legitimacy: Regulation inside government ................................................ 18
Article: Black, Calling Regulators to Account ..................................................................................... 20
Article: Mahoney (1999), The regulatory state and its legitimacy problems .................................... 20
Week 5 Alternatives to classic regulation .............................................................................................. 22
Article: Lytton (2014), Competitive Third-party regulation ............................................................... 25
Week 6 International regulation ............................................................................................................. 29
Article: Genschel (1997), Regulatory competition and international co-operation ......................... 29
Article: Abbott, Snidal (2000), Hard Soft law in international governance ....................................... 29
Week 7 Better regulation ....................................................................................................................... 33

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Week 1 Introduction: What is regulation and where does it come

from?
L&W: Chpt 1
Majone, G. (1997). From the positive to the regulatory state: Causes and consequences of changes in
the mode of governance. Journal of Public Policy, 17(2): 139-167.

Chapter 1:
Definition of regulation = a specified set of legal commands or all forms of intentional use of authority

We try to think as a regulator. It is practical, less theoretical. There is no perfect regulation, there are
always imperfect parts.

Regulation -> ‘Regulatory state’

- A maturing field: theory and practice –

o EU: identifies ‘better regulation’ as a key concern for growth
o OECD: Regulatory policy group
o NL: Regulatory reform group

Administrative costs decline economic growth; this is why good regulation help economic growth

- Short history of regulation

o Regulation is old, but …
o Boom in the 19th century: public health, utilities (railway, water, electricity)
 This boom started because governments got more tasks

o ‘Regulatory state’ in 1980s-1990s:
 From the Positive to the Regulatory State:
 Positive state: the state provides a kind of things on her own
o Tax money (redistribution, state provision)
 Regulatory state: the state does not do everything self, but regulates
o legal means as an instrument to secure public interest; third
parties must comply and carry the cost of complying
 Causes and Consequences of Changes in the Model of Governance
(Giandomenico Majone 1997)

- 20th century:
o Post-WWII: Keynesianism, Welfare-state
 Changes had to be made, the welfare state grows
o 1980s-1990s:
 Privatization (utilities)
 Deregulation (anti-red-tape), but more importantly …
 Extensive use of market instruments, so more regulation (education, health)
 Regulation inside government (performance control, auditing, oversight)
NPM
 Regulation becomes the mean task of the governance

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Article: Majone (1997). From the positive to the regulatory state

1. Privatisation
I. E.g. utilities. Public interests in private hands, but rules developed and enforced by
specialized agencies
2. Europeanisation of policy making
I. Regulations, directives, often exceeding purely national rule-making. Financial
mechanisms in the EU modest
II. Regulatory capacity needed. Direct initiatives on regulatory policy (Regulatory Impact
Assessment; stakeholder consultation, principles for good regulation)
3. Growth of proxy government, third party government
I. Delegation, decentralisation, semi-independent agencies = contractual relations =>
regulating third parties that provide services
II. ‘Agency’ model very important:
i. Expertise & credible policy commitment
ii. Political control over agencies through oversight committees

‘Regulatory state’

Some consequences:

 The Judiciary important player in administration and policy development.

 Increasing role of experts and regulators
o Regulation as a science (before competing interests or class politics) What about
democratic legitimacy?

Positive state restrained by:

 National, European, Global forces -> spread of new governance model

Challenges in the 2000s:

 Governance of regulatory bodies: Oversight, Agencies

 New technologies and products. Speed of innovation. (internet gambling, GM food)
 More interest in non-traditional regulation
(self-regulation by industry, ‘nudging’)
 … and Regulatory reform and better regulation more broadly

Case 1: Obama Calorie Mandate

 Regulation necessary
o Constrains behavior, but also …
o Makes things possible: e.g. traffic, radio wave allocation in broadcasting, used car
market (“market of lemons”)
 Failure in regulation
o Regulatory burden: costs to the business, administrative costs (enforcement), costs
to the public
o Not achieved outcomes
o ‘Regulatory capture’: serves the interests of the industry

Regulations is 3 elements (see book)

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1. What do we want? Withs standers

2. Change in behavior. Can we change the behavior?
3. Information gathering

What is regulation?

Regulation …

 … as a specific set of commands (binding rules – e.g. health and safety standards at work)
o Specific
 … as deliberate state influence (incl economic incentives –taxes, subsidies, information etc.)
o Broader
 … as all forms of social or economic influence – ‘smart regulation’ inc. professional and
voluntary organizations
o Biggest circle

…could go further: informal institutions, norms (non-hierarchical rules)

There is not one definition

Regulation is needed. We have to agree on things so the society can function

‘Regulatory regime’

 Regulation involves three key aspects (L&W):

o Standard-setting
o Behavior-modification
o Information-gathering

What is regulation?
Three key aspects:
1. Standard-setting: the aspects of regulation that set out the direction of the regulation,
namely its target, its objectives and the way in which these objectives are to be followed.
Also the choice of agents belongs to standard-setting.
2. Behavior modification: The way in which rules are complied with and enforced.
3. Information gathering: systems of regulation require elements of detection as otherwise
regulators would not know whether their standards make sense and are being complied
with.

 Why to regulate? (L&W)

o Monopolies; Externalities; Information asymmetries; Public goods (Missing or
incomplete markets)
o Social solidarity: define the society in which we may wish to live
 e.g. quality standards in prisons, elderly homes: Rights
 Access to education and health (merit goods)
 Income redistribution

Why to regulate?

 Market failure arguments: (L&W)

o Monopolies
o Externalities
o Information asymmetries

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o Public goods (Missing or incomplete markets)

 Social solidarity
o define the society in which we may wish to live
 e.g. quality standards in prisons, elderly homes: Rights
 Access to education and health (merit goods)
 Income redistribution

Regulation is an intentional activity that seeks to alter the behavior of another party. However this
does not mean that regulatory activity should solely understood as an activity conducted by public
regulatory agencies. Rather the regulatory toolbox provides for a number of techniques and
alternatives that need to be considered.

Traditionally regulation is justified by market-failure terms. This is under challenge now since
analyses suggested that market failure was not as prominent as believed and that regulation often
had political and interested group origins rather than a basis in economic analysis.

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Week 2 Theories on regulation. Standard setting.

L&W: Chpt 2-3

Makkai, T. and John Braithwaite (1992) In and Out of the Revolving Door: Making Sense of
Regulatory Capture. Journal of Public Policy 12(1): 61-78.

Throwback last week

Good regulation: benefits vs. costs

Why to regulate?

Reasons for the government to intervene in free markets: In general terms:

- Market failure arguments: (L&W) mean reason

o Information asymmetries
o Externalities (example: pollution)
o Natural monopolies
o Public goods
- Social solidarity: extra reasons
o Define the society in which we may wish to live
 E.g. quality standards in prisons, elderly homes: rights
 Access to education and health (merit goods)
 Income redistribution (as externalities: It could prevent crime)
 A lot of points can both be explained through economical
argumentation as social argumentation: The combination could
strengthen your argumentation

Theories of regulation (chapter 2)

Next to the rational economic reasons

- Help to conceptualize a cause-effect relationship:

o How regulatory regimes emerge (and change?)
o Therefore: Why they (sometimes) fail?

Four theoretical approaches:

 Regulatory capture (origins and change)

Regulation is always captures by those interests that were supposed to be regulated. The
relationship between regulators and regulatees has always been far too close with regulators
regularly ending up in the lucrative positions in regulated firms. Captures regulation only
distorts true market forces and therefore leads to undesirable economic outcomes.
 Unintended consequences (current nature and dysfunctions)
There will always be unintended consequence. Regulators can not foresee future events and
with the limited resources at their disposal cannot ensure that they will be prepared for all
eventualities.
 Ideas (ideational shifts explain origins and change)
It has been driven by particular light-handed ideology that assumed that regulatees would be
interested in and capable of monitoring their own behavior. This belief is of course

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misplaced. We need new politics of regulatory ideas that emphasizes the importance of
addressing systematic market failure rather than one that is reluctant to intervene forcefully.
 Institutional design (explains how regulation works)
There is a need of closer attention to the design of regulatory institutions and instruments,
then there would have been less opportunity for things to go wrong. Most of all, this relates
to the way in which regulatory agencies conduct their oversight activities and the way in
which politicians are unable to change the overall regulatory regime as time goes by.

In the textbook ‘Managing Regulation’ described as explanations for regulatory failures (ch. 2)

Case: What explains the ban on incandescent bulbs in EU?

- Regulatory capture:
a. The regulation supposed to be for public good, but when it is captures it serves the
private sector (=industry)
i. Life-cycle argument:
1. Step 1: heavy regulation, after heightened public attention (youth)
2. Step 2: politicians lose interest, industry opposed to ‘tough’
regulation and expresses to politicians who become hostile to
regulation (maturity)
3. Step 3: Regulators seek accommodation with industry, to avoid
extinction (old: agencies become reactive and procedural)
i. Result: regulations waters down, and later maybe
even disappear
ii. Capture at the point of origin:
1. Industry’s interest: limit competition
2. Why regulators give in? Politicians->reelection->need support.
Concentrated benefits of the industry vs dispersed costs for public

General effect of regulatory capture: -> mostly tougher regulation (but less regulation is also
possible: this happens to prevent more regulation through the state, companies could self-regulate.

Case: tougher regulation; created a new market, trough lobbying

Theories are most of the times not perfect, there are challenges to the theory:

- Different interest groups, not only industry.

o How dispersed or concentrated both sides are, matters.
- Aligned interest: smoking, environment
o Regulator wants the benefits of stricter rules
o Industry wants stricter rules to limit competition
- ‘Revolving doors’ (mixed career paths in the two sectors) make also regulators and industry
close (ignore politicians!)

Solutions:

 Deregulation – reduced availability of rent

 Install counter-interests (mobilize interest groups)
 Fragment industry interests (investment and retails banking)
 Institutions (better oversight, credible commitment etc)

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Article: Makkai and Braithwaite (1992), In and Out of the Revolving Door: Making
Sense of Regulatory Capture
Three empirically distinct forms of capture:

 identification with the industry,

 sympathy with the particular problems that regulated firms confront in meeting standards,
 and absence of toughness.

Revolving door: there is mobility in the industries. And this has an effect on regulatory capture, it
makes it bigger. The revolving door is inevitable

Is this a problem?
Depends on the way you look at it, but there is no reason to worry.

- Positive: you keep quality

- Negative: you support regulatory capture (and, integrity problems)

Politicians
(public)

Industry Regulator
(regulatee) (inspectorates)

Abstract figure of the regulatory situation

- Unintended consequences

Individuals and organizations are inherently limited in their capacity to process all information given
time and other constraints.

… and inevitable ‘wear-out’ of regulation

Overall framework: evolution of many unexpected things happening -> bounded rationality:
satisficing (Simon, 1947)
= limited capacity to process all information, heuristics (many actors, not just one power center)

Different ways of unintended consequences:

- Layering: side effect of institutional change in multiple regulatory regimes based on different
assumptions and objectives operate alongside each other are independent.
o No replacement, but evolution
 This leads to uncertainty overall effects on the way in which the overall
regulatory regime operates in the future
- Drift: environment changes, and regulation gets redefined

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- Interaction effects: a simple change may affect the overall power across different actors
(‘decentered regulation’)
- Unpredictable complexity, ‘autopoiesis’=necessary features emerge out of chaos (a living
cell). Regulation has an irritation effect, and then self-organization.
- Self-referentiality: operate according to their own logic, but nevertheless interact with their
environment in a process of self-generation and reproduction.
- “one size fits all regulation”  contemporary economies are shaped by different dynamics,
therefore making any search for ‘one’ regulatory standard for predictable intervention even
more unrealistic
- Decentered sources of regulation important to address the inherent limitations of regulatory
oversight.

Other institutional mechanisms of change include:

- conversion: regulatory regimes established for one purpose are used for another
- displacement: the removal of old rules and their replacement with new ones
- exhaustion: breakdown and failure

- Dominant ideas and worldviews

Regulation is a result of the wider ideational climate that shapes politics. Ideas matter in
temrs of the way regulatory tools are selected. Ideas also shape how politicians place
themselves towards specific regulatory issues. Ideas have been used to explain earlier
periods of regulatory change: especially the period of deregulation.
- Actors do not act strategically, but wider ideological and societal trends
o E.g. supremacy of the market. Deregulation.
o Ideas shape the way regulations are formed.
o Example: hierarchy is a good thing (past) -> self-regulation is a better way (now)
- Specifically about regulation: grid and group theory (Hood 1998)
o Grid: to what extent bound by rules
o Group: collectiveness
 Hierarchy, ‘peer review’/professional, markets, (fatalism)

Grid-group cultural theory points to four rival worldviews or implicit theories that are inherent in
particular regulatory approaches: hierarchy, individualism, egalitarianism, fatalism, emerge from two
dimensions grid and group.

Failure according to cultural theory would be explained by overemphasis on one particular worldview
 namely individualism (over competitiveness in the market)

- Regulation is a communicative process: shared understanding

- Institutional design

- Transaction cost approach (politicians, agencies and regulated industries)

- Information asymmetry
o Control: Regulators evade political control, industries evade regulatory control
o Commitment: likely to reverse regulation (build in ‘credible commitment’
mechanisms
o Blame shifting: institutions to shift blame in case of damage (for all three)

Standard setting (ch. 3 textbook)

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- Standards: tell us what we want to achieve, what kind of behaviors are desired and what to
do if we diagnose a difference between desired and observed states of behavior.
- Basic characteristics: explicit statements intended to change behavior and are required to
have a degree of generality to allow for broad application.
- Precision: suggest that we know hat is appropriate that we can clearly distinguish and that
we have the means to clearly diagnose what is rightful and wrongful conduct. Three
particular aspects:
o Transparency  idiot proof
o Accessibility in the sense of the standard being applicable without requiring major
effort
o Congruence in the sense of the standard representing a widely-accepted cause-effect
relationship

5 prerequisites

o Clarity: be knowable and stable

 If people do not know the rules they are unable to comply. Common law
tradition has mens rea (guilty mind) convention suggests that individuals
should not be accused of wrong-doing if they were not aware. \
o Visible and acceptable
 Underlying assumptions should be appropriate. Difficulties with accepting
rules that seem to fly in the face of common sense.
o Consistency
 Standards should not contradict other rules
o Verifiable
o Validation
 Open for validation and represent robust categories, appear similarly
straightforward at the first sight. Standards can only be enforced or complied
with if its possible to know whether the law is being broken or not.

- Nature:
o Compliant vs resisting target
o Potential technological change
- Criteria:
o Precision (avoids interpretation problems
o Targeted: Over- and under-inclusion
 65 you retire (unfit young workers continue to operate potentially sensitive
machinery whereas older but fit highly competent workers are forces to
retire.
o Transparent: simple
o Proportionate
 Are in conflict with each other -> trade-of: A very good targeting will mean
the regulation will be less transparent, and so on...

The better regulation principles suggests that regulatory standards should be:

- Proportionate:
o Regulators should only intervene when necessary, and the regulatory responses
should reflect the potential risk and harm posed, while costs of regulatory
intervention are identified and kept to minimum

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- Accountable:
o Regulators should be able to justify their decisions and it should be subject to
external scrutiny
- Consistent:
o Not contradict each other
- Transparent:
o Should be simple and user friendly
- Targeted:
o Should be focused on the problem and minimize size effects

Other aspects

‘Clear rules’ vs Pinciples

Rules: specific prescriptions

Principles: broad guidance  more demanding on regulatory subjects requiring them to decide for
themselves how to translate broad principles into action  self-regulation important

Who usually wants what?

Types of standards:

- Technology-based: (case, type of bulb)

- Performance-based: the outcome
o For innovation this is the best type, because it is directly in relation with the wanted
outcome
o But, it is costlier and hard to monitor
- Management-based: regulates what the management is doing. The internal organization.
Standards focus on operational practices within regulated entities. Organizations are
required to identify core issues that affect their production process and develop measures to
address these potential problems. Assumes that organizations are capable of self-diagnosing
vulnerabilities and of developing effective remedies to tackle these potential risks.

Case: Light bulbs

Economic/ rational argument: the new bulbs are way more efficient, reduces pollution

Theoretical approaches:

- Regulatory capture:
a. Philips (powerful actor) develop a new better light bulb (strong position), then they
pushed the EU government to speed up the regulation (this makes their market
position even better)
i. They even created a new market by trying to push the regulation to create
this market. This vison is even more extreme
ii. Even another way of thinking: companies could also care about the
environment: combination of market thinking and helping the environment -
> the effect could be even more costumers (social responsibility)

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1. Companies sometimes need collective action to create this shift in

more environmental market
- Unintended:
- Ideas: ‘there is something in the ear’, paradigms, case: easy way to reduce the use of energy
- Institutional design:

Good regulation?

- Political yes
- But, monopoly for Philips
- And, ground toxic because there is no way

Week 3 Compliance and enforcement. Regulatory burden.

L&W: Chpt 4
OECD (2000) Reducing the risk of policy failure: Challenges for regulatory compliance. Paris: OECD.

If you make perfect rules, it is still no guaranty for good working regulation

Enforcement & compliance

Regulation is about seeking to achieve objectives that otherwise would not be obtained. Core
question: why do people not voluntarily comply with the rules?
Enforcement = the use of fore to compel particular parties to do things they would not otherwise do.
It is not simply about rule-design (easy and precise), but includes also detection (deals with
information asymmetries), information-gathering and effecting or modifying behavior (sanctioning
styles, motivational impact).

Four ways to respond on non-compliance:

- Amend the rule

- Rely on persuasion and advice so that regulated parties understand why complying is in their
interests
- Rely on punishment
- Make it impossible to break the rule

Main question: ‘how do we make people/ organizations do what we want?’

Case: Regulation about animal welfare

Who do we try to enforce?

- The companies and (regulatee)

- The national regulators (regulator)

Why do we see compliance problems?

- Lack of willingness (self-interest) – amoral calculator (not the same as immoral, but the
economical calculation is preferred)
- Lack of information (ignorance): not aware of the regulation

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- Lack of resources (ability): not the ability to adjust to the regulation

Why does it matter?

It determines the way we look at the problem: two different theories

Deterrence:

Assumes that individuals and organization calculate there utility of rule breaking

- Amoral calculators, costs of complying vs benefits of non-complying

- Compliance problem -> increase punishment Economic calculus of compliance: if the
likelihood of detection is low, the level of punishment should be increased to achieve
compliance. Also suggest that: fines have no deterrent effect if the perceived probability of
detection is negligible. Mostly presence of enforcement produces compliance effect.
o (E.g. or detection: in road safety: perceived rate of presence more important than
the size of the punishment)
- Important even for persuasion-based instrument:
o Unfair if violators get away
o Reputational damage

Conclusion: focuses on lack of willingness and resources. And there is always some part of pressure/
hierarchy in enforcement

Concerns: differential effect  large firms are said to e less affected by deterrence than smaller
firms, because responsibility and liability are more complex and not personal.
Also criticism for the potential to be indiscriminately used or abused.

Empirical evidence:
Difficult to asses if it is ‘deterrence’ since there are a lot of other reasons why firms might comply,
such as reputations or normative reasons. Research shows that deterrence always plays an important
background role even when values are motivating compliant behavior. Such background roles
operate in two ways:
1. Importance of seeing other firms being sanctioned, so reminding firms of the potential sanctions
2. Experience of previous fines and sanctions that might have left a reputational legacy

Persuasion:

Approach based on the assumption that it is better to prevent harm from occurring than to punish
wrong doing  strategies are mediation and negotiation.
 wrong doing is not based on cost-benefit analysis but because of non-strategic motvies, namely a
lack of resources or ignorance.

- Non-compliance is non-strategic (ignorance, lack of resources)

o Information, advice and argumentation as instruments
o To evaluate complex operations, you need to understand processes deeply and for
that you need open conversations (no sanctions)
o Play on social conscious
- BUT: Too ‘cozy’ – no healthy mistrust btw the regulators and regulatee
- Seems particularly appropriate in those cases where regulatory targets are reluctant
compliers (so unwilling to comply)  In contrast cases where compliance is well-intentioned

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a deterrence based approach might trigger perverse effects: the experience of being
punished despite having acted in good faith might encourage firms to become increasingly
reluctant to engage with regulators in an open manner.
In other words, deterrence-based enforcement strategies may turn ‘honest triers’ into
‘amoral calculators’ and foster overall culture of resistance.

Conclusion: focusses on lack of information (becomes a bigger way of thinking in enforcement of

regulation). And persuasion alone is not enough, it doesn’t reward those who comply and punishes
those who non-comply

Willingness to comply
High Low
Level of knowledge High Honest triers Amoral calculators
about regulatory
requirements
Low Organizationally Principled objectors
incompetent

Conditions for effective enforcements

- Two side to enforcement:

o Detection: ‘information gathering’ (monitoring, inspecting)
o ‘Effection’: modifying behavior (i.e. sanctioning)
- What should regulators do when faced with non-compliance (C. Hood)
o Amend the rule (complies with spirit vs letter of the rule)
o Persuasion and advice
o Punishment
o Make it impossible to break the rule

Could we have lowered the risk of the failure?

OECD speaks about a better design of regulation. On this way we can look at how we should improve
regulation when we still don’t know the consequences. -> design phase

 Design phase:
o Ex ante: impact evaluation (trying to experiment on what the consequence will be)
o Ex ante: evaluation of compliance factors
 Evaluation:
o Collect compliance data
 Measuring not input but impact

What’s the problem of non-compliance?

- Additionally:
o Unnecessary costs

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o Erodes general confidence in the use of regulation and government

o Cumulatively undermines obedience to regulation

Core questions:

1. Underlying motivations?
2. What should regulators do when faced with non-compliance?
3. Who should enforce? (How close or far)
- revolving door: career structure that encourages mobility (partial vs competency)
- close to the regulated profession: good (expertise) or closed network (medical profession)

Mixed strategies

Article: OECD (2000), Reducing the risk of policy failure

It is an organization with a political point of view, this point of view changes through time

- 1980s: deregulation
- 1990s: regulatory quality management improving the efficiency, flexibility, simplicity, and
effectiveness of individual regulations and non-regulatory instruments.
- Now: the management of regulation – to improve the total impact of regulatory systems in
achieving their social and economic goals

Mixed strategies:

 Responsive regulation
 Smart regulation
 Risk-based regulation
 Enforced self-evaluation and meta-evaluation

1A. Responsive regulation

Enforcement should be perceived as an iterative

interaction between regulators and regulatee.

The pyramid of enforcement (Ayres and

Braithwaite 1992). You start at the bottom with
advice and warnings. If the institutions don’t
lissen you go higher on the pyramid and become
less nice. It is a combination between deterrence
and persuasion. It assumes that the intention of
regulation is to make regulatees reflect on their
own activities.

Two messages of the pyramid:

1. Number of cases can be solved at the bottom
2. It points at the availability of escalating sanctions

- Responsive regulation is both focused on the regulation of the government (in the higher
steps of the pyramid) and is focused on self-market regulation (in the lower steps of the
pyramid)

Adapted in many countries and regulators.

Criticism:

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 With big risks not appropriate to start with the bottom.

 [Other occasions it may be more appropriate to go back to the bottom after escalation]
 Expensive tit-for tat strategy requires iterative interactions between parties. If non-
compliance mood, what is the point of this. Start on top.
 Assumes very clear one-on-one relationship so that regulator can influence the behavior and
predict response. In reality regulatory regimes are complex – many regulators.
 Fairness and democratic accountability. Discretion. Consistency concerns.
 It assumes that everyone is capable of following regulatory advice

Solutions offered in Ayres and Braithwaite: Public Interest Groups (PIGs) legally empowered parties
to make such decisions, thus weaken the regulatory capture problem. Difficult to make to work since
turns to shadow regulator.

In some: conceptually helpful but difficulties. Must still think about the enforcement and compliance
systematically when choosing a solution.

1B. ‘Smart regulation’

Focuses the importance of diverse sets of actors that might influence compliance with regulatory
objectives such as financial markets, insurance etc.

(Gunningham, Grabosky, Sinclair)

 Builds on respons. reg: sanctions gradually escalate in case of noncompliance

 Difference: Regulation not only from government, also businesses selfregulation, third
parties (public interest groups).
 In case of non-compliance: move higher not only in terms of a single instruments but across
instruments

(Co-regulatory entities: informal, supported by formal when noncompliance) Cross-sanctions

Difficulties: coordination of such a regulatory network

1. Risk based regulation

Widely accepted that human decision-making is likely to be more focused on those few big risks than
those that are frequent but have low impact.

Regulation is costly, for both parties. We are trying to reduce this burden (risk based regulation). We
are searching for high and lower risks. Only when normal regulation doesn’t work the government
should monitor that institution that does not follow the normal rules.

We use less resources and are more effective. Creating certificates could be a way to improve the
enforcement of regulation

Official UK approach, also OECD recommendation

Focus on:

- Probability of something going wrong

- Impact of something going wrong

…. Compliance history of the firm matters

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It provides a formula to justify why certain areas are inspected more frequently  scientific risk
assessment and economic cost-benefit analysis.
But:
- risk assessment is difficult to do it politics-free
- it far from clear whether the basic definition of an assessment of risks to achieving regulatory
objectives is easy to fulfill
- it is more about specific organizations rather than a wider system
- it requires analytical capacities to understand the motivation and capacities of regulated firms to
manage their risks

2. Enforced self-regulation and meta-regulation

Enforced self-regulation = the focus is self-regulation, but it also has some enforcement of the
governance
Meta-regulation = the primary responsibility lies with the industry. The job of the regulator is to
inspect how the industry works (which procedures are used?). Do the organizations take the
regulation seriously? There are basic rules and the industry is free to fill in the way of working
(management side)

- The role of professional associations:

o E.g. legal profession, insurance, press
- Variety:
o Government backed or not; legally binding or not
o Self-regulation may be in drafting regulation but monitoring and enforcement by
other bodies
- Benefits:
o Expertise, know what is reasonable
o Efficiency (closer to information source; easy low threshold problem solving (e.g.
press offenses)
- Types
o Co-regulation (=government oversight); enforced self-regulation (government
delegates regulatory functions to regulated firms. Government audits whether the
tasks are filled.)
o Meta-regulation: similar, focus on management-based regulation (Catherine Parker)
- Problems:
o ‘Amoral calculators’ do not comply
o Presumes innovativeness and creativity on behalf of regulatee that may be
overestimated

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Week 4 Accountability and legitimacy: Regulation inside government

L&W: Chpt 11.
Black, J. (2012) Calling Regulators to Account: Challenges, Capacities and Prospects. LSE Law, Society
and Economy Working Papers 15/2012.
Majone, G. (1999) The regulatory state and its legitimacy problems. West European Politics, 22(1): 1-
24.

Risk: de possibility of calculating the probability and severity of impact. The likelihood of a particular
adverse effect occurring within a given time period.
Uncertainty: The conditions of calculability do not exist
Boundaries between risk and uncertainty are blurred due to the insight that certain risks are
inherently difficult to anticipate as ideas regarding probability and predictability become disputed
and/or are difficult to process for individual day-to-day decision making.
Two dimensions: voluntariness and information asymmetries  differences across types of risks

Different views and approaches concerning how standards for risk regulation are set and how
attention to risk should be institutionalized. Different views of nature and risk regulation:

Emphasis Instrument Goal

Nature as unpredictable Respond to events Ad hoc/post hoc Reduce unintended
responses consequences
Nature as self-regulating Stress on market Reduce distorted price Minimize instrusion
and individual signals and support
choice markets
Nature as controllable Stress on expert Stress on expert Antipative whole-
forecasting bodies society approaches
Nature as highly Stress on Participatory Protect or give priority
vulnerable encouraging institutions to worst- off
popular
participation

Legitimacy and accountability

Legitimacy: reasons to exist (democratic values); about the rules and regulations itself (highest point
in the pyramid)
Accountability: who is accountable? (reasons can be found in the institutions/ organization)

Both problems of the ‘Regulatory State’:

- Regulatory state: extensive delegations of policy-making powers to independent, non-

representative institutions (regulatory agencies, commissions)
o Those institutions are semi-autonomous

The reason behind this is spitting up politics and bureaucratic: this creates concerns; only the politics
are legitimacy, but hold the professionals accountable

Concerns:

- Political legitimacy
- Accountability

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Independence of agencies

- QUANGO’s: quasi-autonomous non-governmental organization

o Non-governmental because there don’t take direct orders from the minister (of
parliament). Example: they have a board elected by the minister, but next to this
they are own regulated
- Why to delegate? (theoretical arguments)
o Cognitive limitations of parliamentarians: Expertise and (political) neutrality
o Reduce decision making costs
o Blame avoidance
o Credible commitment: once there is an organization for regulating, it will keep on
existing. It is there to stay
- Why to delegate? (practical justifications)
o More expertise
o Legitimacy in the eyes of the regulators: the industry doesn’t want political
influences, shifting to a nonpolitical organization makes it more legitimate
o Easier to involve stakeholders
o More flexibility: (but this conflicts a bit with the credible commitment argument)

In the past the QUANGO’s where smaller, in this period it was normal that the organizations take
direct orders from the minister. New regulatory organizations are more of this new kind.

Agency theory

Politics: principle
Regulator: agent

Principal-agent theory:

- Delegation of powers
- Non-aligned goals

When to delegate? -> Transaction costs

Accountability challenge: -> Costly verification

Key question: What is the perfect combination between autonomy and legitimacy?

In practice: mechanisms to reduce discretionary decision making:

- Reason giving
- Information disclosure (e.g. about competition)
- Public hearing: the public institutions have to go to the parliament to answer question (direct
way of influencing)
- Procedural: offer feedback opportunities to rules
o Example: Dutch organization that tries to reduce the bureaucratic burden of
regulation

Mahoney: In short, the key insight of agency theory is that control is to a large extent a question of
good institutional design, while the older theories viewed control as being exercised from one fixed
point within a given institutional framework.

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Article: Black, Calling Regulators to Account

Why is accountability difficult to achieve?

5 core accountability challenges:

- Scale and scope of regulatory landscape:

What is ‘regulation’, what is an ‘independent agency’ and therefore what is an ‘independent
regulatory agency’.
- The number of organizations involved in any one regulatory domain, the complexity of their
relationship and their propensity to blameshift (= the problem of multiple hands and shifting
roles)
The second challenge is that frequently more than one regulator is engaged in regulating a
particular sector and/or in achieving particular goals (often under the remit of different
government departments), and, moreover that these tasks are shared with different parts of
government. In most areas of regulation, there are multiple organizations involved, even
where the regulators are ‘mega- regulators’, or the amalgamation of several pre-existing
regulators.
- The opacity/ nature (=ondoorzichtigheid) of the regulatory tasks (= complexity)
The overall outcomes that regulators are meant to achieve are usually specified in highly
general terms. Their legal mandates often specify a range of objectives which they have to
achieve, which may in some instances compete with one another. There are also
considerable difficulties in measuring performance against generally framed outcomes, in
distinguishing which elements of that performance are due to the regulator and which to
other causes, and determining the time period over which performance will be measured.
Furthermore, assessing performance can require judgments to be made on counter factuals.
- The opacity of regulatory processes: the principles are created by the politics; they should
create clearer guidelines for the regulators to create regulation on
o = Calls for more discretionary judgement, e.g. regulation by principles

Most of regulation occurs in practice between those two visible poles of ‘inputs’ and
‘outputs’. Regulation is a continuous process of negotiation, compromise and challenge on
both sides of the regulator-regulatee35 relationship. It is very hard for outsiders to penetrate
or have clear sight of that process.

- Willingness of the accounted to be called to account

Finally, accountability is a two-sided relationship: the accountee has to accept the ‘right’ of
the accountor to hold them to account. The agencies discussed here have all been given legal
mandates and powers, and are expected to operate independently from political control
(and from ‘capture’ by the regulated industry). The balance between independence and
accountability is inevitably one which is being continually negotiated between accountees
and accountors. As a result, even organizations which are apparently in a strong institutional
position, due perhaps to their legal powers, can find their ‘right’ to act as accountor called
into question.

It is hard to predict problems and make accountability rules, but after an accident it is easier to point
a finger.

Article: Mahoney (1999), The regulatory state and its legitimacy problems

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Reasons for delegation:

Older theories: lack of expertise
More sophisticated reason: that delegation to specialized agencies reduces decision-making costs by
allowing legislators and government executives to economize on the time and effort required to
identify desirable refinements to legislation, and to reach agreement on these requirements.
Decision-making costs increase as legislation becomes more specific because of the greater difficulty
of reaching agreement when the costs and benefits of the proposed measures are spelled out in
detail. Since legislators' resources are limited, spending time and effort refining legislation reduces
their ability to advance other legislation or to take other actions.
Other reasons: avoid blame, legislators not only avoid the time and trouble of making specific
decisions, they avoid or at best disguise their responsibility for the consequences of the decisions
ultimately made.

 reduce of decision-making costs and blame avoidance

Main reason for delegating policy-making powers to such institutions: the need to achieve credible
policy commitment
- Short-termism long term solution needed, but politicians have a short term
- First, growing economic and political interdependence among nations has the effect of
strengthening the international impact of domestic policies
- new issue in Europe, particularly as a result of the privatization and subsequent statutory regulation
of the public utilities. These industries share distinctive features. They generally exhibit important
economies of scale, which favor the formation of monopolies or oligopolies. For this reason, public
utilities have always been subject to some form of regulation.

Autonomy vs. accountability

- In Europe, agencies tend to have less independence but therefore less explicit accountability
structures
- Accountability mechanisms in place:
o The article argues that “problems of democratic legitimacy should be tackled not by
limiting the independence of the regulators, but rather by strengthening the
accountability structure”.

Procedural and substantive constraints by administrative acts: administrative hearings, legislative

supervision and executive influence; judicial review

Legitimacy issues in EU

Is on this moment very venerable

- E.g. European Central Bank -> not subject to any democratic (majoritarian) institution
- Arguments of democracy deficits (NB! 1999)
o EP as a democratically chosen should have power
o Political integration slow -> no popular acceptance
o Veto power is the legitimizing element, but now the shift towards majority voting

Complexities with accountability

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There is a discussion about, and need for, a solution of the gap

Too much focus on the issue of independent agencies?
Ned to look for mechanisms how to keep a regulatory regime accountable:
4 theoretical approaches

- Fiduciary trustee perspective: experts can be trusted but need for some ex-post control
(transparency)
- Consumer sovereignty perspective: information needed
o Reduce the power of the regulator, and empower the consumer, does not work
every situation
- The citizen empowerment perspective: citizens participate, can challenge contribute (town-
hall view)
o Let’s make the public more in cashed in the process. On this way the regulator gets a
good start where to look, it is less hierarchic
- Distrust and surprise perspective: formal oversight open to capture and info asymmetry
o The idea that there is always a possibility of capture: let’s give up, because there is
no solution for this: only small regulation

Week 5 Alternatives to classic regulation

L&W: Chpt 5-6

Lytton, T.D. (2014 ) Competitive Third-party regulation: how private certification can overcome
constraints that frustrate government regulation. Theoretical Inquires in Law 15: 539-571.

What is regulation? (week 1)

The example of the different circles in bigger circles. The smallest circles are classical regulation. But
there are also alternatives, this regulation is divined more broadly.

Alternatives to classical regulation (book, ch. 5)

- Command-and-control (classical)
- Variants of classical regulation
- Variants of self-regulation
- Market-based alternative
- Architecture and nudging

Classical regulation

 ‘Command and Control’ – traditional hierarchy

 Clear fixed standard backed by criminal sanctions
o Weaknesses:

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 Inflexibility (potential lack of innovation), over- and under-inclusion, not

proportionate (‘hit them all’ approach) The demand for regulation follows
the political instinct to ‘hit them all’ and thereby failing to target regulatees
in a proportionate way
 Focuses on minimum compliance, not aimed on improvement (there is no
reason for the companies to aim for improvement) The regulation will be
seen as a minimum compliance target, but no motivation or incentive to
improve
 Encourages gaming and cheating (effect of hierarchical forms of
enforcement) (= motivational problem)
 Costly:
 Setting the standards
 Costs of bureaucracy: both in terms of inspections and other
compliance activities
 Simplistic: in reality many ‘regulators’
 There are more than one regulatory systems

Those weaknesses ask for new ways of regulation: variations of alternatives. The structure of the
market/ industry will mostly determine the best way of regulation. Overall, it is important to see
these different options as complementary rather than competing options.

Any discussion of alternatives is inherently based on 3 value-driven choices:

- The way we understand the definition of the underlying basic problem

- The balance of assumptions regarding the significance and the likelihood of market failure vs.
regulatory failure
- The underlying assumptions regarding the capacity and motivation among the actors to
address a particular problem in a satisfactory way

Variations to classical regulations

o Exemptions for specific groups (more aimed on good targeting/ flexibility) (but
capture threat)
o Tolerate some non-compliance, or ask for justification of non-compliance
 If the producer can justify why, in this case, the regulation is not fair, it is
allowed

Self-regulation

Main idea: focusing on the close connection between regulator and regulate to deliver public goals.
Self-regulatory alternatives are said to reduce the level of rule-prescriptiveness by state-based
regulators. 3 variants:

 Professional self-regulation: individual level

o Regulated professions (lawyers, medical, press)
o Strengths: expertise, norms enforced through socialization
o Weakness:
 May be lenient so it requires legitimacy and the attribution of legitimacy by
outside bodies.
 May be too rigid

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 Lack of strong bodies to seek redress in the case of wrong doing (e.g. ofter
argued that alternative medicines suffers from a lack of profession self-
regulation in contrast to more orthodox medical practice)
 Professional identity required that does not tolerate non-compliant behavior
 Presumes strong professional associations (strengths and weaknesses can go
both ways)
 There are mostly codes of good behavior (norms and values)
 Sanction mechanism is threat of exclusion from the profession.
 Industry self-regulation organizational level
o The industry makes some rules public, in this way they have to keep those promises
to not lose public appreciation
o True self-regulation (‘labels’, codes of conduct)  the regulatees impose their own
commands and their inherent consequences upon themselves
o Meta-regulation (enforced self-regulation): government supported  the imposition
of commands by regulatees follows broad instruction and guidance by outside
regulators

Side note: Difference between self-regulation and meta-regulation is one of separation of regulator
from regulates. In meta-regulation the government provides regulatory standards and organizations
are legally required to develop their own responses.

 Co-regulation (‘shadow of hierarchy’) intermeshing of non-state and state autorithy

Definition: an explicitly specific non-state regulatory regime set up as part of a (inter)-
governmental strategy.
o Symbiosis: government approved standards, but developed and enforced together
(e.g. universities association)
o Regulation that is directly linked to public policy goals and supported by the state-
based legal frameworks. The state grants discretionary power to industry to develop
their own regulatory standards, while the state backs these regimes with its
authority
 Pro: reduce decision-making costs: the industry pays the standard-setting
and monitoring processes

Market-based alternatives rely on market mechanisms and economic incentives

 Basic idea: using the market for regulation; the use of the price-mechanism (appealing to
individual and organizational self-interest)
 Model examples: environment permits, paying for school presence (to parent for the kids to
go to school; but discussion, is this ethical correct?)
 Strength: ‘light touch’, efficiency, innovativeness (?) (-> incentives allow organizations to go
beyond minimal levels of compliance if it is possible to do so)
 Variations:
o Tradable permits (Kyoto, radio licenses)
 Good example: the CO2 quota, good academic study, they did make their
goals, but we could have made this even without this system, it was costly
o Consumer information (and league tables) (e.g. Hospital quality information)
 Solving the problem of focusing on the minimum, by giving better
information. On this way there is more room for innovation. Relies of (a
better) choice of consumers. But:

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Requires ‘rational’ consumers

Information needs to be consistent and displayed in places where
actual choices are made
 Such schemes require some degree of consistency
o Certificates (often in cooperation with NGO’s)
 Steering the industry through costumer choices -> case eco-labels!
 Labels level up the quality of the goods, and it adds a ‘premium’ to the price
o Financial incentives (taxes and subsidies); e.g. subsidies for using environment
friendly technology
 Idea: including costs that otherwise remain external to the production of the
good
 It reduces/ increases the demand via the price function
 Criticisms:
o Costly to figure out prices (transaction costs), messes with market mechanisms;
dependency, morality

Case: eco-labels

Why eco-labels do not seem to work?

- facts: what are the symptoms?
Too much, not a better product, enz

- What is the cause of the problems?

More than one market is failing:

- Label market: information problem

o At this point it is a lemon market: we should get good working certificates so a new,
good working, eco-label market can exist
- Eco friendly market
o Could this be better achieved by classical regulation?
 What is the positive point of using labels?
 Allows transnational regulation
 Budget problem: It lifts the costs to the private sector: Less efficiency
when regulation through government, especially the monitoring

Article: Lytton (2014), Competitive Third-party regulation

Market demand is the key success to private certification. But it is not always reliable. Market
competition among certifiers sometimes leads them to lower their standards in order to reduce the
costs of their services = race to the bottom

This articles examines ‘third-party certification’: certification by entities other than those that make
the products.

Key success factors for reliable certificates (and its comparative institutional advantages over
government regulation):

- Sufficient consumer demand

o Creates enough incentive for the industry

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- Brand competition among certifiers based on reliability

- Interdependence among participants (up and down-stream)
o It makes it more efficient if there is a stream of interest in the labels through the
market)
- Concentration of market power in the hands of a few large certifiers (easier to coordinate
and enforce; otherwise it gets too big, complicated)
- A core of active and vigilant consumers (contribute to monitoring)
- Industrial morality and social network (a shared sense of mission) (This is a social context
factor; other factors rely on market structure)

Architecture and nudging (both the same object)

Nudging draws on market-based strategies by exploiting information and disclosure requirements or

through the price signal. The basic assumption is that individuals make decisions without fully
reflecting on their actual long-term consequences.

Trying to make consumers comply without you even knowing. Not direct rules, but making it easier
to choice the, by the government of industry preferred, outcome. Change behavior through design.

 Changing incentive structure (=change the default option)

 Examples: organ donation, insurance packages, health policy
 Strengths: low cost, strongly voluntary
 Weakness: technocratic view, hidden interventionism (you take away the choice of the
consumers)
 Most insightful example: panopticon effect; allows an observer to view all prisoners from
one single point, without the prisoners knowing that they are being watched. It describes a
way through which regulators can insert themselves into a nodal positions that efficiently
allows them to monitor regulatee conduct, with the regulatees being unsure as to whether
they are being watched or not.

Regulatory pluralism

Designing policy mixes (Gunningham & Sinclaire)

The mixing of regulation systems could combine all the positive aspects and reduce negative
outcomes.

Regulation inside government (textbook ch.6)

- Result of the public sector reform from 1980s and 1990s:

o More contractual relationships (i.e. quasi-markets, semi-private providers)
o Also more attention on performance and accountability
- What is regulation inside government? Three fundamental activities
o The quality of services (e.g. local employment offices)
 Offered during the delivery of services within set policy objectives, for
example inspections of hospitals, the military, prisons and universities
o Audit of public expenditures
 By using a court of auditors and other financial watchdogs that seek to
scrutinize whether public monies have been used in an efficient and
appropriate manner
o Ethical conduct (conflict of interest cases)

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 Especially in terms of conflicts of interests or other bodies that process

complaints regarding alleged irregularities in official behavior

Key change with regulation inside governance is the growing diversification in ownership in the
delivery of public services, especially the use of private providers. Also the prominence granted to
freestanding regulatory bodies within government that check on governmental activities.  so
growing trend explicitness of rules and of freestanding oversight

Problems?
When it comes to power of public authority over private activities, there remains, in principle, the
power of the state to coerce individuals and organizations to comply with the law. Within the public
sector such a reliance on a state’s coercive power as ultima ratio regnum is more limited. There are
only very few cases where a public sector body has taken another to court. Problems occur on
horizontally equal relationships, there are no higher organs, no hierarchical relationship or seniority
and expertise differences. Vertical relations face similar problems since these are characterized by
cooperative interactions, a shared interest in avoiding external criticism and surveillance and a
mutual desire to maintain informal control relationships where regulation is at most a soft and highly
politicized affair.
So horizontal: lack of clear lines and hierarchy and lack of interest dealing with other departments
vertical: limited by issues of close social relationships or relational distance

C. Hood: Regulation inside government: Waste-watchers, quality police and sleaze-busters (Oxford
Univ Press)
Waste-watchers (money side, we don’t want waste)
Quality police (quality)
Sleaze-buster (ethical)

There is a need for internal governmental regulation

Why problematic?

Horizontal relationships

- No coercive public force (court option limited)

o No hierarchical relationships
- Awkward dynamics:
o Junior staff advising senior staff (hierarchical in private arrangements! E.g. PPS)
- Political game (choices): sacrificing one value for the other = trade offs

Complexity of values: access, efficiency, equity

It is harder for the government to regulate itself then private organizations.

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Instruments for regulating IG (= Inside

Government)

- Oversight (hierarchical):
inspections etc.
o Increase relational
distance (e.g. involve
more partners, involve
international
organizations)
o Min: gaming threats
- Competition and transparency
o Contracting out of
public services;
Collective comparative
performance
information (rewards)
o Plus: reduces
information asymmetry
o Min: over-lenient
practices; measurable indicators difficult, gaming, comparability (cream skimming)
- Peer reviews and evaluations:
o More accepted
- Solution: hybrids?

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Week 6 International regulation

L&W: Chpt 7
Abbott, K.W. & Snidal, D.(2000) Hard and soft law in international governance. International
organization 421 (54,3)
Genschel, P. & T. Plumper (1997) Regulatory competition and international co-operation. Journal of
European Public Policy, 4(4): 626-642.

Article: Genschel (1997), Regulatory competition and international co-operation

Article: Abbott, Snidal (2000), Hard Soft law in international governance

 Soft law: incentives to comply. There are some legal agreements but there are no sanctions
 Hard law: standard and mostly even legal agreements, it is a precise legal agreements

3 dimensions

- Obligation:
- Precision:
- Delegation:

Rationales for hard law (article pro’s)

- Strengthening of credible commitment: The difficulty states have in credibly committing

themselves to future behavior is widely viewed as a characteristic feature of international
‘‘anarchy’’ and an impediment to welfare-enhancing cooperation.
- Reducing transaction-costs: On balance, at least, hard legalization reduces the transactions
costs of subsequent interactions. Two types of interactions are especially relevant: one is the
‘‘managerial’’ process of applying and elaborating agreed rules; the other is the more
adversarial process of enforcing commitments. The role of international regimes in reducing
transactions costs—especially the costs of negotiating supplementary agreements—has been
extensively analyzed
- Modifying political strategies: As proponents of legal process theory make clear, hard
legalization allows states (and other actors) to pursue different political strategies as they
work to extend and enforce (or to weaken or escape) international agreements.
- Handling problems of incomplete contracting: States sometimes attempt to write detailed
agreements to constrain auto-interpretation, reduce transactions costs, and increase
enforceability. But though precision has great value, it also has several problems. It may be
wasteful, forcing statesto plan for highly unlikely events; it may be counterproductive,
introducing opaque and inconsistent provisions; it may lead to undesirable rigidity; and it
may prevent agreement altogether.

Rationales of soft law (pro’s)

- Lowering contracting costs: A major advantage of softer forms of legalization is their lower
contracting costs. Hard legalization reduces the post-agreement costs of managing and
enforcing commitments, but adoption of a highly legalized agreement entails signing can’t
contracting costs. (biggest pro)
- Sovereignty costs

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- Better able to deal with uncertainty: Many international issues are new and complex. The
underlying problems may not be well understood, so states cannot anticipate all possible
consequences of a legalized arrangement. One way to deal with such problems is to delegate
authority to a central party (for example, a court or international organization)to implement,
interpret, and adapt the agreement as circumstances unfold. This approach avoids the costs
of having no agreement, or of having to (re)negotiate continuously, but it typically entails
unacceptably high sovereignty costs. Soft legalization provides a number of more attractive
alternatives for dealing with uncertainty
- Tool to compromise

In sector where there is a lot of change, it is hard to create hard law. Soft law aims more on providing
guidelines. States mostly don’t want to lose their own regulation. The weakest link decides what the
regulation will be. For this reasons: soft law increases the probability of implementing hard law in the
future

Different forms of international regulation

o Box 1. State-to-State
o E.g. UN
o Concentrates on those international agreements that bind states to particular
standards and focus on the behavior of governments. WTO or Kyoto protocol.
o Key emphasis is naming and shaming rather than on legal provisions.
o Disadvantage: intergovernmental character; it is maintained that such regimes have
difficulty in generating compliance. Their ratification requires consent in national
legislative arenas. Also poor expertise and lack of flexibility.
o Box 2. Private-to-State
o E.g. rating system of countries
o Credit rating agencies, whose downgrading of sovereign debt shaped the evolving
financial crisis in the late 2000s.
o Private accreditation agencies that regulate public university programs.
o Box 3. State-to-Private
o E.g. World health organization
o Guidelines for multinational enterprises that sought to facilitate a code for
transnational enterprises in the face of sustained criticism of their conduct.
o International principles are further elaborated by secretariats and networks of
actors.
o WHO Code of marketing for breast milk
o Box. 4 Private-to-Private
o E.g. eco-labels
o Occurs across a variety of regimes that seek to develop binding codes of conduct and
monitoring systems.
o Key motivation is the protection of reputation
o Standard setting  IASB

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Two key aspects:

1. Despite the significance attached to private regulation of private processes, the state still remains
an important actor.
2. Information-gathering is highly important.

Two ways of lowering down reputational power

- Delegation:
- Mandating:

Sometime the borderlines of the different forms of international regulation are very unclear. What is
state and what is private?

What explains the choice of the forms? (kind of law)

- Decision making cost: the costs of negotiation and information gathering (e.g. changing
regulation)
o the costlier negotiation and renegotiation of standards, the more likely it is that they
will seek to shift standard-setting to private participants. At the same time, if these
activities are seen as critical for national governmental authority, then regimes will
be ‘state-based’.
- Agency costs: information gathering (complexity)
o if it is hard to get information, it is likely to adept soft law
o the more complex and difficult information-gathering is, the more likely a reliance on
private self-control over the production chain and the active sponsoring of third
parties
- Commitments costs: costs of not complying: the likelihood of cheating (companies are willing
to comply if other countries also comply)
o the more likely to cheat and thereby undermine the system, the more likely hard law
- Uncertainty costs: change of changing situation, rather flexible standards

Agency costs + uncertainty costs: cause soft law

Decision making costs + commitments cots: cause hard law

 The clearer the situation is the bigger the change of hard law is

Contrasting international modes of regulation:

- Contrived randomness: emphasis on whistleblowing, NGO reporting and potential

reputational damage of establishing incidents of malpractice.
- Rivalry: Self-certification schemes reflection the self-interest of economic actors. Reliance on
competing standards leads to a race to the top with different producers wishing to appear
particularly compliant. Reporting allows for benchmarking exercises.

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- Hierarchy: emphasis on legalization. Reliance on formal subordination and reporting with

mandated sanctions. Private authority to act granted by state-powers.
- Mutuality: emphasis on standards and practices of transnational epistemic communities and
other communities in practice that pollinate regulatory approaches both across jurisdictions
and also within national jurisdictions. Emphasis on peer-review mechanism.

Regulatory competition: Race to the bottom

- Tragedy of the commons: is the reason for the race

o Collective action problem
o The decision of declining quality is caused by economical interest:
 You get economic advantages for lowering quality (Mostly it is cheaper)
o Without cooperation no individual incentive to regulate
o So, cooperation needed to avoid race to the bottom

E.g.: taxes, pollution, Asylum seekers

Regulatory competition: Race to the top

Definition: wanting more efficient and stricter regulation, so competition for other parties is harder.
The benefits of the regulations must outweigh the costs of conforming to them and also the costs of
relocating to jurisdictions that have them.

- Benefits: Design and implement high quality standards

- Implementing innovation, thus better reputation
- Strengthen domestic industry, foreign competitors might lose out

The idea of race to the top is an effect (overlooking) the race to the bottom. Countries and
companies work now mostly in the knowledge economy. The quality is here (apparently) more
important. Reputational effect is important (it gives a sign of good regulation; environment or labor).
It is an idea of an incentive to great better quality for states and companies.

Why international regulation?

 The growing importance of international regulation is a consequence of internationalization and
the growing complexity of economic relations.
The most arguments calling for international regulation are suggestions that national-based
regulation cannot deal with particular externalities

Race to the top: only occur when the compliance with higher standards can be certified and tested.
Race to the bottom: jurisdiction, accordingly, are engaged in a competition over regulatory standards
and enforcement practices.

International regulatory responses are said to be required in cases where capital is highly mobile and
is therefore able to ‘threaten’ particular jurisdiction with exit.
A related desirable outcome is the tragedy of the commons and wider problems with governing so-
called common pool resources. In the absence of the ability to monitor and enforce to compliance of
other parties it is not in the self-interest of anyone to comply with common standards.
International regulatory regimes further deal with issues of compatibility. Key issue is to find
common standards that facilitate trade or expand potential markets. It is therefore in the interest of
economic producers to come to a shared solution. Racing jurisdictions no incentive to cooperate.

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Transaction-costs as a rationale for the establishment of international regulatory regimes points to

further administrative aspects.
International regimes are also associated with dominate states, which benefit from the presence of
particular rule systems.

Week 7 Better regulation

L&W: Chpt 10&12

OECD: Better Regulation in the Netherlands.
OECD (2008) Introductory Handbook for Undertaking Regulatory Impact Analysis (RIA)

Regulation has become a field of study. There is a conversion of what is good regulation.

Spread of “Better Regulation”

 Attention of international organizations

o OECD Regulatory policy group:
 Think tank; aimed on rich countries:
 Neo-liberal view: pro self-regulation, against regulation burden.
 Best practices: enforcement & inspection; international regulatory
cooperation; risk management
o European Commission: Better regulation initiative
 Better quality of new commission proposals: systematic use of impact
assessment and public consultation in the development of new policy
proposals
 Monitoring and reducing administrative burdens
 Thanks to CUT 25% on-line questionnaire (Action program for
reducing administrative burden)
o World Bank: Doing business approach
 Whole world aimed, against administrative burden
 National initiatives
o Regulatory reforms (e.g. NL regulatory reform)
o Institutionalization:
 Watch dogs – e.g. ACTAL or NGOs
 Better regulation unit: Ministry of Finance, Regulatory Reform Unit –
 Regulatory reform steering group (under Prime minister)

Key ideas within the “Better Regulation”

1. Regulatory Impact Analysis (RIA)

2. Reduce administrative burden
3. Stakeholder consultation
4. Other provisions: sun-setting; crowd-sourcing

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1. Regulatory impact assessment (RIA)

 The costs and benefits have to be calculated before implementing: are the alternatives
(included doing nothing) a better choice
 Curb: being more careful to not produce too much regulation; limiting regulation burden

2. Reducing administrative burden

Both ways:
 Cost of regulation for companies (compliance)
 Cost for creating and monitoring by the government (enforcement)

Standard cost model: Idea that the general regulatory burden stays the same
“one rule in, one rule out”

3. Stakeholder consultation

Every stakeholder has to be consulted before creating regulation

Reasons:

- Level playing field: opening the process helps other voices to be heard. Better picture of the
real situation
- Source of evidence: expert know more; people with experience (they know better)
- Control mechanism: better monitoring, enz

Critical design element (difficult points)

- Timing: when the regulation is already finished the use of stakeholders isn’t a good option.
But when there isn’t any regulation jet, including the stakeholders will not provide a useful
outcome
o “Not to early, not to late”
- Who should be included?
o Balance different voices
o But it has to stay efficient

4. Other provisions (Against the regulatory burden)

- Sun-setting
o To force reevaluation
o Unless the rule is evaluated positive it will stay. Different way than normally
- Crowd-sourcing:
o Online consultation to improve the system
- Specific regulatory approaches
o Smart regulation
o Risk-based regulation

What is better regulation? (Chapter 10)

Regulation more systematically, focusing on quality or regulation across governmental bodies and
seeking to establish principles that allow for consistent approach towards: (the agenda for better

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regulation)

standard setting: agenda is concerned with avoiding problems of ‘command and control’
information gathering: Increasingly focused on inspection and information requirements that add to
compliance costs.
behavior modification: agenda has paid particular attention to compliance costs aspects in particular
regarding the conduct and consequences of inspections

Better regulation instruments seek to improve by using procedural means. More meta-regulation
and second-order regulation.

Tools for better regulation:

Consultation: when, how, whom and in which form you need to consult throughout the various
drafting stages of regulatory decision-making process. More rules of consulting to create a level
playing field between interested societal actors and thereby prevent biased participation in the rule
making process.
There is a risk of consultation procedures becoming a fig leaf to legitimize options that have already
been decided. This risk has to be assessed against the opportunity of consultation procedures
opening up the regulatory process at a relatively early stage and thereby introducing further
elements of accountability.

Regulatory impact assessment: includes an assessment of different options, how compliance is likely
to be obtained, what the impact on various parts of the economy and society is likely to be and what
the criteria for ongoing monitoring and evaluation might be. They provide the evidence base for the
rational selection of regulatory approaches, they encourage avoidance of unnecessary regulation and
they offer a framework for the input of societal actors in consultation process.
Problems: trade-off between depth and breadth in the required analysis. Problem of weighting
pertains to the demands for the extensive monetization of costa and benefits. Problem of imbalance
in terms of certainty and costs.

Cost measurement approaches: seeks to asses the administrative costs to business in complying
with information obligations arising from regulation.

How to govern better regulation: independent watchdog unit, commission at center of government,
unit in head of government’s office, unit in a ministry, agency

What is good regulation? Chapter 12

Orthodox answers and questions on what is good regulation points to the legal and efficient use of
regulatory powers. There is not a single answer, but good regulation can be seen from a lot of
different perspectives. It raises more questions than it provides in answers.
Different strategies that can be said to constitute good regulation in order to achieve good regulatory
values:
1. Strengthen adaptability: emphasis on unpredictable elements in terms of standards, information
gathering and behavior modification, thereby facilitating flexibility.
2. Strengthen predictability: emphasis on non-negotiable rules, reporting duties and legal sanctions
3. Strengthen incentives: emphasis on self-interest and rivalry-based standards and yardstick-type
information revelation
4. Strengthen participation: emphasis on consultation and close relational distance for information-
gathering emphasis on persuasion and responsive regulation

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