Regulatory failure (4): Institutional perspectives

In the previous blog posts, I have approached the notion of regulatory failure from a public interest perspective and a public choice perspective on regulation. This post will look at regulatory failure from institutional perspectives on regulation.

A very brief summary of institutional perspectives on regulation

Institutional perspectives on regulation broadly overlap with the theories of the policy process that are well known to scholars of public administration.[1] Within these perspectives, some focus on small and gradual change, others on rapid and shock-like change, and others on no change at all.

Various factors may trigger modest changes to regulatory systems. Over time, the small changes add up to big ones. Alternatively, large-scale and rapid regulatory change may be triggered by external shocks, such as society-wide crises (the Covid-19 pandemic is a prime example) or environmental disasters that cannot be quickly responded to with existing regulatory systems.

Of course, sometimes a regulatory system or parts thereof should be changed, but no change is happening due to institutional constraints. For example, a regulatory system may have become so rigid over time, so caught up in politics, or so captured by vested interests that it is virtually impossible to change it.

Regulatory failure from this point of view

For those who look at regulation from an institutional point of view, regulatory failures are situations where the wrong sorts of changes are made to regulatory systems, where the wrong sorts of new regulatory systems are introduced (or where the suitable systems are wrongfully dismantled), or where required changes are not made.[2]

Kinds of failure and their causes from this point of view

The literature that engages with regulatory failure from an institutional point of view follows the three broad themes that I set out above: regulatory failure due to incremental change, crises and shocks, and no change.

Incremental change

Small and incremental changes to regulatory systems can be flawed and turn into a regulatory failure over time. But more is at stake. The ongoing layering of new initiatives onto existing regulation may result in regulatory systems with internal inconsistencies, unnecessary redundancies, overregulation, and a general lack of coordination. The public at large may experience such complex regulatory systems as burdensome, and it may experience the ongoing process of change as proof that regulators will never get it right.

In a similar vein, incremental changes in the context of regulatory systems may, over time, result in a situation where that system is no longer capable of achieving its aims. For example, incremental non-compliance that is not corrected by the regulator may become the norm for the industry targeted by the regulator. Likewise, changing government priorities may, over time, result in situations where regulatory agencies can no longer carry out their statutory obligations. For example, ongoing minor cuts in a regulator’s budget will eventually result in situations where it cannot enforce sufficiently and may not be able to ‘prevent’ a failure to occur.[3]

Such unintended consequences of modest but accumulated changes will, likely, only become visible after some time has passed. However, there is a risk that the most recent change is seen as the trigger of a situation of regulatory failure.

Crises and shocks

Regulators are often blamed for not preventing significant society-wide crises (such as the Covid-19 pandemic or climate change). Regulatory failure is conceptualized as the lack of a timely response by regulators to a slowly emerging or quickly developing crisis in such situations.

Shock-like events and disasters (such as building collapses or transportation incidents) are often framed as a regulatory failures as well. Typically, somewhere in the causal chain towards the crisis or shock, a product or activity did not comply with regulation, and the regulator failed to observe this non-compliance. The shock and its consequences are then seen as having revealed something is structurally wrong with a regulatory system or the responsible regulator.[4]

Arguably, in most of these situations, many will agree that the regulator only played a modest part in the crises or shock and simply could not have assessed whether each and every part of life complies with regulation (Hood, 2007).[5] But in the political blame game that follows such crises and shocks, something must be blamed, and that something has become ‘the regulatory system’.

No change

A final group of regulatory failures presented results from institutional constraints that stand in the way of change—effectively, the regulatory failure is ‘no change’. For example, regulatory systems may have closed themselves off from outside disturbances and input over time. This could result from reliance over many years or even decades on a handful of in-house technical experts (think of complex building regulations) or ongoing reliance on the input from a handful of industry players (think of complex financial regulation).

Another challenge that may arise over time is that a regulatory system becomes too rigid or too complex to understand for most of its beneficiaries (who often have little incentive to study the system’s intricacies or lack access to the regulator). In simpler terms, rigidities in a regulatory system may lead to public disappointment in that system (they may see it as a failure) and a feeling that there is no point for them to try to change it.[6]

To conclude

The institutional perspectives add another essential dimension to understanding regulatory failure by shifting our attention towards the (often unintended) consequences of changes to regulatory systems (or the lack of such changes) over time. Seen in this light, regulation may fail not only because of technical errors in its design and implementation (as per the public interest perspective) or because of human and organizational behaviour (as per the public choice perspective). Instead, regulatory failure may happen simply because regulatory systems are not subjected to periodical ‘regulatory warrant of fitness tests’ and are not maintained well over time.

The insights added by the institutional perspectives may help us refrain from seeking the ‘culprit’ of regulatory failure in the most recent change to a regulatory system or a necessary change that is long overdue. Instead, it asks us to look at the intricate interactions of the many parts of regulatory systems, the interactions between regulatory systems and their environments, and the consequences of minor and large changes in those systems and their environments on (long-term) regulation performance.

[1] Weible, C., & Sabatier, P. (2018). Theories of the policy process – fourth edition.

[2] Baldwin, R., Cave, M., & Lodge, M. (2012). Understanding regulation: Theory, strategy and practice – second edition. Oxford: Oxford University Press.

[3] Haines, F. (1999). Regulatory failures and regulatory solutions: A characteristic analysis of the aftermath of disaster. Law & Social Inquiry, 34(1), 23-50.

[4] McDermott, k., & Peterson, C. (2005). The anatomy of institutional and organizational failure. In M. Crew & M. Spiegel (Eds.), Obtaining the best from regulation and competition (pp. 65-92). New York: Springer.

[5] Hood, C. (2007). The risk game and the blame game. Government & Opposition, 37(1), 15-37.

[6] Baldwin, R., Cave, M., & Lodge, M. (2012). Understanding regulation: Theory, strategy and practice – second edition. Oxford: Oxford University Press.

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