By Jan Sammeck
The thought of self-regulation as an device able to mitigating socially bad practices in industries - comparable to corruption, environmental degradation, or the violation of human rights - is receiving tremendous attention in conception and perform. by way of drawing close this phenomenon with the speculation of the hot Institutional Economics, Jan Sammeck develops an analytical procedure that issues out the severe mechanisms which come to a decision concerning the effectiveness of this software. via integrating concept with sensible examples of self-regulation, this examine highlights the need to examine the institutional incentives of an undefined, so that it will come to a legitimate judgement concerning the feasibility and effectiveness of this tool in a given situation.
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Extra info for A New Institutional Economics Perspective on Industry Self-Regulation
Private action may thus become cost-prohibitive for the individual firm, if the achieved reduction of transaction costs in stakeholder transactions is overcompensated by a competitive disadvantage on the market. By forming an industry-wide commitment, actors seek to make these costs competition-neutral, thus mitigating the impact that costs of compliance with ethical standards have on the maximization of profit, while still securing a reduction of transaction costs in stakeholder transactions. Motivation for Collective Commitment Reputational Spill-Over Prohibitive Private Action Figure 1: The Motivation for Collective Commitments 98 For a historical illustration outside the sphere of self-regulation on how collective responsibility affects the incentives of individuals, see Greif (2006b).
128 Frohlich and Oppenheimer (1970, p105) 129 Becker (1960) 130 North (1994, p6) citing Shepsle (1991); here, motivational credibility is differentiated form imperative credibility. In imperative credibility, a commitment is credible, because there is technically no alternative to renege ex post, because one has taken steps to ex ante curtail one’s ability to do so. In motivational credibility, defection is technically possible, but irrational in the sense that one is worse off if one reneges. 38 Given the assumptions about actors behaving strategically, collective commitment may not be incentive-compatible and self-enforcing, in that it is not the maximizing strategy to honor it.
100 Both choices and expectations of firms will hence rest on the beliefs that they have about each other’s possible actions, and the utility they attribute to the outcomes of those actions. Thus, in a world of potentially opportunistic and maximizing individuals, the strategically rational actor will assume that others may renege from agreements if it is beneficial for them to do so. As the compliance with ethical demands is seldom costless, the maximizing firm will only comply with these demands to the degree where the benefits of doing so outweigh costs.
A New Institutional Economics Perspective on Industry Self-Regulation by Jan Sammeck