Why self-regulation can pay off

Eoin Hudson Opinions, Research

TL;DR: companies that address issues on their own can sidestep more impactful future regulations.
Hyperproof summary: with the specter of increased compliance and controls looming for multiple industries and from various corners of the world, the thought of self-regulation might sound like a self-inflicted wound, but a Stanford study shows that may not be the case.

The traditional rationale, which has faced recent challenges, was that self-regulation gave a competitive advantage in product and labor markets by projecting a positive image. A recent Stanford study, however, focused on a different justification, “Firms may exceed regulation in order to reduce support for stricter regulations among key stakeholders, thereby forestalling future implementation of these regulations.” Or more simply put, by attempting to solve a problem on their own, a company signals to activist groups, politicians, consumers, etc., that going through the process of adding regulation isn’t necessary, or worth the cost.

Examples can be found today, such as JUUL restricting sweet flavored vaping products, and in the past, like the Motion Picture Association of America’s (MPAA) rating system. So how effective is self-regulation, and how should it be implemented? Stanford’s study found that broad, yet shallow regulations could reduce the presence of outside controls by 77%.
Key takeaways:

  • Without self-regulation, pro-regulatory forces dominate in 68% of cases
  • Implementing broad and shallow regulation can drop this number to 16%
  • Broad and deep regulation drops it further, to 4%

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