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The processes determining regulatory impacts are increasingly centered within firms and industries themselves, and in the working relationships among private and public actors. This article examines two aspects of this issue: (a) the effects of economic interdependence on the social control of industry and (b) the emergence and behavior of regulatory professions within the private sector and their collaboration with public regulatory counterparts. We consider how these forces have influenced private regulation in the United States securities industry.

This article integrates research on rule development, compliance, and organizational change to model rule development and compliance in organizations, using causal-loop modeling from system dynamics to articulate explicitly a few key underlying processes. We focus on financial markets as a case area, suggesting that recurring regulatory problems in financial markets in the United States over the past 60 years, although differing in specifics, are structurally similar. At the heart of the model is the tension between production goals that focus on short-term, certain, salient benefits and required adherence to production-constraining rules that attempt to mitigate long-term, uncertain, nonsalient risks. It describes systemically how organizations attend to rules depending on the nature of the benefits of production compared with those of rule compliance. The model captures the operative mechanisms responsible for the development of pressures for production and for rule compliance in organizations, providing a structural explanation both for problem-prone organizations characterized by erosion of standards and increased violations and for organizations following rules more reliably. Drawing on studies of institutional work, we conclude by suggesting research on how agency, through strategic and tactical choice, potentially modifies structure in rule compliance.

One can identify compelling reasons for private and public organizations to embrace participative systems. Scholars and organizational consultants maintain that organizations need such systems to prosper in an increasingly competitive and turbulent world, and that such changes are now taking place. Yet, participative techniques have diffused minimally. Why is there such a discrepancy between the endorsements and adoption of participative methods, despite the strong arguments for them and their intuitive appeal? This paper maintains that barriers to participative systems are embedded in social, economic, and political principles deeply valued in their own right. Writings on participative systems treat these barriers as difficult problems that can be overcome through patient, well-designed behavioral and organizational interventions. In contrast, we suggest that the structures and attitudes impeding participative systems are usually valued more highly than the prospective gains from the systems, and that, in the future, true participative systems will have difficulty sustaining themselves in an organizational landscape that continues to favor systems of centralized control. Similar impediments operating in areas as different as management and government regulation suggest basic processes that rise above specific contexts. The paper draws on two pertinent but heretofore disconnected scholarly literatures—the literatures on cooperation and on collaboration—to analyze the experiences with participative systems in management and regulatory policy. Four themes—prior dispositions toward cooperation, social and political organization, the nature of purposes, issues, and values, and leadership capacity and style—are critical to understanding each area. Generally, participative systems bump into problems of collective action: dispositions against cooperating with prior adversaries, the costs of collaboration in complex social and political systems, the difficulties of engaging deep conflicts, and leadership incentives favoring control that develop in this context. These conditions repeatedly undermine incipient, fragile participative systems. The study of participation would benefit from closer attention to how social, economic, and political structures constrain or facilitate such systems, and more extensive links among the various literatures on the subject.

Public and private organizations deal closely with each other on regulatory issues. Newer forms of regulation rely on shared enforcement and supervisory responsibilities, regulatory negotiation, and other methods that try to get beyond remote public commands while maintaining effective public involvement This article examines how regulators and firms deal with each other, the interdependence that forms between them in the course of their work, and the benefits and liabilities of the strong ties that may develop out of this interdependence. We use the securities industry as a context for discussion but indicate that the points apply more generally. We pay special attention to the potential benefits and risks of cohesive regulatory networks. Regular dealings among regulators and firms outside of regular rulemaking or enforcement proceedings enhance cooperation, reduce information disparities, strengthen regulatory cultures, and arguably lower the threshold of external pressure required to effect changes within firms. The conditions enhancing these benefits, however, also will restrict the flow of information, perspectives, and criticism from outsiders, potentially leading to erosion of performance standards and eventually serious problems. We describe the circumstances under which these tensions are more likely to be managed without damage from these problems and the broader implications for research and teaching in public management and policy. Adapted from the source document.

This paper examines how a collaborative effort between the private and public sectors, called the Derivatives Policy Group (DPG), helped shape current regulation of financial innovation. In 1994 and 1995, this group of six large financial firms developed procedures for risk management, internal controls, and reporting for largely unregulated areas of finance, in cooperation with the United States Securities and Exchange Commission and Commodity Futures Trading Commission. The process succeeded despite strong competition among the firms themselves and incentives for both the public and private sectors to resort to adversarial lobbying and legal challenges. The Derivatives Policy Group was a path-setting event in the development of flexible regulation of financial innovation that is now the norm for related policy making. The case is important in and of itself--the financial markets are a major concern of national and international economic policy--but here we treat it as an instance of a larger class of problems. Organizational science constantly encounters settings that involve numerous participants who compete or have histories of conflicts; who are interdependent, and collectively would gain (and even individually gain long term) by cooperating rather than competing on an issue; who fall under different governance systems; and who try as a group to design rules and principles governing their behavior. Four factors appear repeatedly in the research on the success or failure of such arrangements. These are (1) the initial dispositions toward cooperation, (2) the extant issues and incentives, (3) leadership, and (4) the number and variety of organizations involved. This paper focuses on how these factors shaped the development and consequences of the Derivatives Policy Group, and the general implications of this process for interorganizational cooperation.

The success or failure of programs typically depends on how numerous variables interact over time. Individuals adjust their strategies continuously on the basis of prior events. Unintended consequences abound, & the very meaning of success or failure may change over time. Yet the studies that command the most influence in the policy community are typically based on multiple regression, a technique whose capacity to capture these complexities is sharply limited. Accordingly, findings based on regression studies & findings based on the study of individual cases commonly conflict. Dynamic simulation modeling can serve as a methodological bridge between case studies & regression-based studies of policy systems. The results of some early experiments along these lines indicate how the bridge can be fashioned. 4 Figures, 1 Appendix. HA.