The Regulation and Self-Regulation of a Complex Industry

TitleThe Regulation and Self-Regulation of a Complex Industry
Publication TypeJournal Article
Year of Publication2015
AuthorsMcCarty N
Keywordsbureaucratic capacity, complexity, D73, Regulation
AbstractI develop model of policy making in complex domains where bureaucrats find it very difficult to establish autonomous sources of expertise so that regulators are highly dependent on the regulated industry. Such policy environments create trade-offs between expertise and autonomy. In the model, a legislative principal decides whether to delegate power to an agency to regulate the activities of a firm or industry. The policy domain is complex in that knowledge of the implications of different policy choices is concentrated in the firm. Unless the agency commits significant resources to building its own expertise, it can learn about the policy environment only through monitoring the firm's efforts at self-regulation. Such learning is imperfect, and the information obtained from monitoring declines as the complexity of the policy environment increases. The main result is that as policy becomes more complex, regulatory outcomes are increasingly biased towards those preferred by the firm. Moreover, when the agency has preferences that diverge from the firm, the firm invests less in its own self-regulatory efforts for fear that its policy investments will be expropriated.