Private Politics and Public Regulation
Georgy Egorov, Bård Harstad
Photo: The Review of Economic Studies
The Review of Economic Studies, Volume 84, Issue 4, 1 October 2017, Pages 1652–1682
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 article 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 U.S., while public regulation continues to be more common in Europe.