Private Politics and Public Regulation, Review of Economic Studies
Public regulation is increasingly facing competition from "private politics" in the form of activism and corporate self-regulation. However, its effectiveness, welfare consequences, and interaction with public regulation are poorly understood. This paper presents a unified dynamic framework for studying the interaction between public regulation, self-regulation, and boycotts. We show that the possibility of self-regulation saves on administrative costs, but also leads to delays. Without an active regulator, firms self-regulate to preempt or end a boycott and private politics is beneficial for activists but harmful for firms. With an active regulator, in contrast, firms self-regulate to preempt public regulation and private politics is harmful for activists but beneficial for firms. Our analysis generates a rich set of testable predictions that are consistent with the rise of private politics over time and the fact that there is more self-regulation and activism in the US, while public regulation continues to be more common in Europe.
Georgy Egorov, Bard Harstad
Egorov, Georgy, and Bard Harstad. 2017. Private Politics and Public Regulation. Review of Economic Studies. 84(4): 1652-1682.LINK