Regulatory failure (6): Bringing it all together

At the start of this series of blog posts, I explained that reviewing the international academic literature on regulatory failure is challenging not only because the term lacks a clear definition. Two other challenges are at play also. First, debates about regulatory failure are often a combination of analytical observation and rhetorical interpretation. Second, the observer’s stance towards regulation often influences their analytical observations of regulatory failure.

Arguably, there is often a double subjectivity when regulatory failure is discussed. First, what the observer sees as a regulatory failure is coloured by their perspective on regulation. Second, how the observer interprets and narrates that observed regulatory failure is coloured by their perspective on regulation. Because there is a wide variety of perspectives on regulation, there is also a wide variety in what is considered a regulatory failure (and its causes) and what is not.

Bringing the four perspectives together To better understand what regulatory failure is and what its causes may be, the last four blog posts have presented regulatory failure from a public interest perspective, a public choice perspective, a private interest perspective, and institutional perspectives. Each perspective shows us something different. The table below gives an overview.

Perspective  Illustration/explanation
Difference in kindDifference in degreeLevel* 
Public interestDesign (instrumental)Micro, mesoFailure to formulate clear and consistent policies, for example due to a lack of information or information asymmetries; a flawed understanding of cause-effect relationships in regulation; every intervention has (unintended) side effects that can be exploited by opposition; a mismatch between (one-size-fits-all) interventions, the problem they address, and/or the context in which they operate.
 Implementation (strategy)Micro, mesoCreative compliance; time-lag between implementation of a regulatory intervention and its results; the challenge that a coercive stance in implementation may result in animosity from regulatees, whilst a cooperative stance may negatively affect compliance.
 (Economic) inefficiencyMicro, meso, macroIt is often difficult to compare the cost of regulatory intervention (or failure) to a situation of no or hypothetical regulation; under-regulation or the absence of regulation; the direct or indirect costs (such as transaction costs or the costs of unintended consequences) of the regulatory intervention outweigh the cost of the market failure.
Public choiceSelf-interested bureaucratsMicroRevolving door mechanisms, individual regulators being open to bribes; shirking by bureaucrats.
 Self-interested bureaucratic agenciesMesoUsing agency appointments as political rewards; pursuit of organizational objectives contrary to those of public policies, which may result in bureaucratic slack and turf wars.
 Bounded rationalityMicro, macroBureaucratic irrationality; bounded rationality of regulators.
 Electoral failuresMesoElectorate chooses policymakers with a regulatory agenda that does not serve their interest, or that do not commit to their regulatory promises; regulators fail to explain regulatory performance to beneficiaries; it is worthwhile for a small group of targets to organize and oppose regulation, but it is difficult for a large group of beneficiaries to organize in support of regulation.
 Legislative failuresMesoRegulatory mandates are necessarily flexible and open to interpretation, leaving considerable room to regulators to diverge from their legal/stated mandate.
 Jurisdictional failuresMesoThe consequences of regulatory interventions (or lack thereof) in one jurisdiction fall on (the populace of) another jurisdiction.
Private interestCaptureMeso, macroThe regulator is influenced by regulatees to such an extent that it systematically favors their private interests and systematically ignores the public interest.
 Life-cycle theory of regulatory failureMeso, macroYoung regulatory agencies are staffed with enthusiasts and have political backing from the coalition that created it, they can regulate their respective industry vigorously. Mature agencies need to find a middle way between political and societal critique about its existence and the industries they regulate. Later in time, regulatory agencies may move towards taking on the opinions, values, and interests of the industries the regulate.
InstitutionalGradual changeMesoUnforeseen unintended consequences due to ‘drift’ (result of changing government preferences, agencies diverting from their statutory objectives, and industry not following regulatory requirements) or ‘layering’ (overregulation, overlap, redundancies, regimes that operate side-by-side, a lack of coordination).
 Rapid/accelerated/ exogenous changeMacroPunctuated equilibrium-type failures (e.g., society-wide crises, external shocks, etc.) that regulation or regulators cannot quickly respond or adapt to.
 No changeMeso, macroSelf-referential regulatory systems that close themselves off from outside disturbances; failures resulting from institutional rigidities; profound disappointment in the public’s expectations and an unwellness of the public to pursue regulatory change.
Note: the sources for all the examples can be found in this series’ four earlier blog posts.

The table distinguishes between differences in kind and differences in degree. Differences in kind refer to the different perspectives on regulatory failure. Differences in degree are the different kinds of regulatory failures identified within each perspective.

The table also distinguishes the levels at which a regulatory failure is observed.[1] Micro-level failures occur at the level of individual actors, such as policymakers or administrators. Meso-level failures are found at the level of regulatory agencies (individual agencies and groups of agencies). They include intra-organizational factors (e.g., organization resources, information asymmetries, financial resources, deficient feedback mechanisms, etc.). Finally, macro-level failures are found in the broader societal, economic, and natural environment.

Please note, by no means is the table meant to provide an exhaustive overview of all the perspectives on regulatory failure and all kinds of regulatory failure that exist. Instead, it is mainly meant to illustrate that there are many ways of experiencing, understanding, and framing a regulatory failure.

Conclusion: What have we learned?

Regulatory failure means different things to different observers. That puts regulators in a difficult position. A small or large public incident is often followed by a political or (social) media blame game. It is then usually found that something was wrong with the regulation in place. Too much or too little regulation. Too enthusiastic or too passive regulatory frontline staff. A too close or not close enough relationship between the regulator and its targets. I could go on and on.

Because of the broad range of perspectives on regulatory failure, often multiple factors can be found that can be argued to have caused the regulatory failure. In most situations of a perceived regulatory failure, it will be virtually impossible for regulators to counter such narratives. Every argument brought in by the regulator will be countered by those who observe regulatory failure. As a result, regulators will likely remain the inevitable political and (social) media scapegoat when small or large incidents happen (though, sometimes regulators are genuinely to blame for these).

The four perspectives on regulatory failure discussed in this research paper may help regulators get a better sense of the various kinds of critique they may face in those situations. That could help to think carefully about the responses they could prepare. In a related vein, we should not forget that whilst regulatory failure often has negative consequences, it can have productive potential as well.[1] After all, some regulatory problems have a long-standing history and are well-known by regulators, their targets, and their beneficiaries for a long time, but it sometimes takes an explicit regulatory failure to generate the political and societal support for regulatory change.

More importantly, the four perspectives indicate that what a regulator would think of as being a regulatory failure is not necessarily what their targets, their beneficiaries, and politicians see as regulatory failure. The four perspectives could provide the basis for a checklist that regulators could go through to check if the various parts of their regulatory systems are still fit for purpose and not at the risk of failing.

Last but not least, the four perspectives have also highlighted that the term regulatory failure creates a false dichotomy between an identifiable point in time where regulation was not failing and an identifiable point in time (and an identifiable location in the regulatory system) where it ‘suddenly’ failed. As Ronald Coase argued, already in 1964, “Until we realize that we are choosing between social arrangements that are all more or less failures, we are not likely to make much headway”.[2]

Any form of or approach to regulation is doomed to fail at some point, but so is each ‘free market’ solution.[3] Often regulatory failure is beginning to grow on the very day a regulation or a regulatory reform is introduced. Rather than asking ‘will regulatory failure happen or not?’, the question should be ‘when will it happen and how do we respond?’. Let’s try not to fear regulatory failures but accept them as a fact of life, learn from them when they occur, and do better a next time.[4]

[1] Derwort, P., Jager, N., & Newig, J. (2019). Towards productive functions? A systematic review of institutional failure, its causes and consequences. Policy Sciences, 52(2), 281-298.

[2] Coase, R. H. (1964). Discussion. The American Economic Review, 54(3), 192-197.

[3] Kahn, A. (1988). The economics of regulation: Principles and institutions – volume 1. Cambridge, MA: Massachusetts Institute of Technology.

[4] Or, as Julia Black puts it, “Regulation will fail, however hard we try to design ways to improve it. The hard part is engaging regulators, firms, politicians, and the wider public in a debate on which failures are acceptable, and which are not.” See: Black, J. (2006). Managing regulatory risks and defining the parameters of blame: A focus on the Australian prudential regulation authority. Law & Policy, 28(1), 1-30.

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