Taming the Corporation: How to Regulate for Success

240 Pages·2021·1.016 MB·English

by  Robert Baldwin, Martin Cave

Taming the Corporation

Taming the
Corporation
How to Regulate for Success
Robert Baldwin and Martin Cave
1
1
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First Edition published in 2021
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Preface
Our goal in writing this book is to set out how positive regulation can
work in a way which is beneficial to firms and investors and to citizens and
consumers. We have combined an account of how positive regulation can
and should work with extended case studies of climate change regulation
and the regulation of traditional physical networks and of modern digital
platforms. In doing so we discuss how regulators can get things right, or
how they may fail to ‘regulate for success’. We have also included a number
of shorter illustrations of success and failure, and a chapter on how regu­
lators can seek to avoid the latter.
This book is not about economic and social policy or its making, which
is the preserve of legislatures or governments, but about the more tech­
nical aspects of regulation that are commonly undertaken by independent
agencies within broad policy frameworks set by governments. Thus strat­
egies for implementing or enforcing given policies are central to our con­
cerns. This is seen, for example, in our discussion in chapter 6 of regulatory
activity designed to support climate change objectives; our objective is not
to discuss governmental objectives but to outline how regulation can best
achieve them.
Robert Baldwin is chiefly responsible for Chapters 1–5 and 10–11;
Martin Cave for Chapters 7–9. Chapter 6 is a joint production. The views
expressed belong to the authors alone and not to any organizations with
which they are affiliated.
The book aims to highlight the strategic relevance of many messages
gleaned from scholarly and practitioner analyses of regulation. For a more
detailed discussion of a wider range of regulatory issues, scholarship
and operational experience see R. Baldwin, M. Cave, and M. Lodge,
Understanding Regulation: Theory, Strategy, and Practice (2nd ed., Oxford
University Press, 2012).
We are grateful to many people for help and advice, including in par­
ticular: Peter Alexiadis, Sean Ennis, Rob Nicholls, and Tim Tutton.

List of Figures and Tables
Figures
4.1 Responsive regulation: enforcement pyramid 89
4.2 The GRID (Good Regulatory Intervention Design) 100
6.1 The net zero challenge 142
Tables
1.1 Enabling versus restrictive approaches 7
1.2 The elements of positive regulation 7
2.1 Core regulatory tasks 15
2.2 Hallmarks of the excellent regulator 19
2.3 Win­win possibilities: nine questions 28
3.1 Common nudge tools 45
3.2 Common behavioural limitations 45
3.3 Nudge tools and corporations 48
3.4 Four models of firm 52
4.1 The DREAM framework 70
4.2 Progressions across three stages of risk development 72
4.3 Factors influencing a firm’s compliance motivation 75
4.4 Measures likely to enhance compliance 76
4.5 The Operational Risk Appraisal (Opra) system 77
4.6 Factors driving risk identifications 79
4.7 Impact of compliance strategy on different types of firm 85
4.8 Impact of deterrence strategy on different types of firm 88
4.9 Contrasting styles of prescription—pilot safety 92
4.10 Performance of different formulations of prescription 93
4.11 Types of firm and reactions to principles­based regulation 95
4.12 Common intervention tools 97
4.13 Firm­types and the effectiveness of intervention tools 98
4.14 Risk types 99
x List of Figures and Tables
5.1 General arguments in favour of precaution 105
5.2 When the evidence is uncertain: arguments for consumer
rather than producer protection 106
5.3 FCA Project Innovate: six initiatives 112
5.4 Innovation­enhancing strategies and different types of firm 114
5.5 Changes that may impact on business costs 115
5.6 Processes for managing regulatory changes 116
6.1 Driving change to improve sustainability 136
7.1 Utility value chains by sector 157
7.2 Rate of return and incentive regulation: two approaches 162
7.3 How estimates of the allowed real rate of return (in % per year)
in a network sector may diverge 168
8.1 Single­ and multi­homing in the food­ordering market and
the resulting effect on platform competition 176
8.2 Potential corrections in the ride­hailing market 179
9.1 Decision­making styles at Oftel 197
1
Positive Regulation
Politicians and commentators often protest: ‘Why regulate? Why not leave
matters to the market?’ They complain about the restrictiveness of regu la­
tion, the way that it interferes with economic activity and increases the
costs of doing business. They see regulation in negative, ‘red light’, terms—
as mainly about stopping healthy entrepreneurial activity.
Case in point: Taking the brakes off
In July 2015 the UK Government launched an initiative to cut red tape in
the energy, waste, agriculture and a number of other sectors.
Business Secretary Sajid Javid said: ‘I am determined to take the
brakes off British businesses and set them free from heavy-handed regu-
lators. The government’s pledge to cut £10 billion in red tape over the
course of this parliament will help create more jobs for working people,
boost prod uct iv ity and keep our economy growing. For the first time,
these reviews will look not only at the rules themselves but the way they
are enforced.’
This book adopts a more positive view and argues that regulation is part of
the process for creating economic wealth and social welfare. Positive regu­
la tion is pro­business and pro­society. Using regulation to tame the cor­
por ation is about harnessing corporate capacities and motivations so as to
maximize the excess of benefits over costs—taking both economic and
social factors into account. We stress here that regulation has a strong
en ab ling, or ‘green light’ role. It is a respectable activity!
Laws and regulations, after all, actually enable markets to operate.
Property laws are the building blocks that support systems of rights and
allow these to be traded in an efficient manner. Without the protections
offered by legal rights the actors in markets would have to take other, far
more burdensome, steps in order to create the levels of security that would
4 Taming the Corporation
induce them to trade.1 Property laws provide readily available, pre­packaged
and secure regimes for allocating rights, and for enforcing these. They
create low­cost frameworks for buying and selling. As Joseph Singer has
stressed: ‘Neither private property nor the free market can exist without
regulation.’2
There is, accordingly, no opposition between free markets and regu la­
tion. Laws allow markets to operate. We may object to examples of bad
regulation, to controls that impose costs unjustifiably, but these examples
make no case for seeing regulation negatively—any more than a few poor
meals should lead us to see food as an unnecessary evil.
It is also misguided to see markets as processes that somehow exist in
states of nature, and which are interfered with by regulators. Markets only
exist and sustain over time because there are general laws and more spe­
cific regulatory regimes that make this possible. Take, for example, the use
of radio frequency bands (or spectrum) for mobile telephony. A range of
frequencies is divided into segments which can be assigned, traded, and
used by companies to supply services to end users. It is the relevant regula­
tory regime (a mixture of general property laws and more particular laws
dealing with telecommunications issues) that makes use of the frequency
bands possible in this way and which provides a controlled environment
in which the market can operate to the consumer advantage. Regulation,
in this context, is logically prior to the market and is enabling.
Companies and entrepreneurs need regulation in order to create wealth.
A first reason for this is consumer and investor confidence. Few travellers
would buy a ticket for a potentially dangerous activity (e.g. travelling by
air) unless they felt that there was a regulator whose actions would ensure
their safety. When consumers think about buying a pension plan they
want to know that there is a competent financial regulator to protect their
important investment. For the airlines and the pensions providers, the
regulators act to promote the purchase of their products as much as their
own marketing divisions. The regulators foster economic activity just as
forcefully.
On the larger scale, inward investments have to be underpinned by
regulatory regimes that create confidence. Take, for example, a train
operating company’s decision to spend millions of pounds in setting up its
business. Before it invests, that company will want to know that it will have
1 See generally J. Singer, No Freedom Without Regulation (Yale University Press, 2015).
2 Singer, No Freedom Without Regulation, p. 2.