Regulatory competition
Encyclopedia
Regulatory competition, also called competitive governance or policy competition, is a phenomenon in law
, economics
and politics
concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction. Regulatory competition depends upon the ability of actors such as companies, workers or other kinds of people to move between two or more separate legal systems. Once this is possible, then the temptation arises for the people running those different legal systems to compete to offer better terms than their "competitors" to attract investment. Historically, regulatory competition has operated within countries having federal systems of regulation - particularly the United States of America, but since the mid-20th century and the intensification of economic globalisation, regulatory competition became an important issue internationally.
The dominant opinion is that regulatory competition between jurisdictions creates a "race to the bottom
" in standards, due to the decreased ability of any jurisdiction to enforce standards without the cost of driving investment abroad. A small group of advocates say that regulatory competition in fact creates a "race to the top" in standards, due to the ability of different actors to select the most efficient rules by which to be governed. The main fields of law affected by the phenomenon of regulatory competition are corporate law
, labour law
, tax
and environmental law
.
enacted a liberal corporation charter, which charged low fees for company registration and lower franchise tax
es than other states. Delaware
attempted to copy the law to attract companies to its own state. This competition ended when Woodrow Wilson
as Governor tightened New Jersey's laws again through a series of seven statutes.
In academic literature the phenomenon of regulatory competition reducing standards overall was argued for by AA Berle and GC Means in The Modern Corporation and Private Property
(1932) while the concept received formal recognition by the US Supreme Court in a decision of Justice Louis Brandeis
in the 1933 case Ligget Co. v. Lee In 1932 Brandeis also coined the term “laboratories of democracy
” in New State Ice Company v. Liebmann, noting that the Federal government was capable of ending experiment.
In the United States legal academia, corporate law is conventionally said to be the product of a "race" among states to attract incorporations by making their corporate laws attractive to those who choose where to incorporate. Given that it has long been possible to incorporate in one state while doing business primarily in other states, US states have rarely been able or willing to use law tied to where a firm is incorporated to regulate or constrain corporations or those who run them. However, U.S. states have long regulated corporations with other laws (e.g., environmental laws, employment laws) that are not tied to where a firm is incorporated, but are based on where a firm does business.
From the "race" to attract incorporations, Delaware
has emerged as the winner, at least among publicly traded corporations. The corporate franchise tax
accounts for between 15% and 20% of the state's budget.
In Europe, regulatory competition has long been prevented by the real seat doctrine prevailing in private international law of many EU and EEA
member countries, which essentially required companies to be incorporated in the state where their main office was located. However, in a series of cases between 1999 and 2003 (Centros Ltd. vs. Erhvervs- og Selskabsstyrelsen, Überseering BV v Nordic Construction Company Baumanagement GmbH, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd.), the European Court of Justice
has forced member states to recognize companies chartered in other member states, which is likely to foster regulatory competition in European company law
. For instance, in 2008, Germany adopted new regulations on the GmbH (Limited Liability Company), allowing the incorporation of Limited Liability Companies without a minimum capital of EUR 25,000 (though the earnings have to be retained until this threshold is reached).
by enacting a lower minimum wage
than other countries, or by making the labor market more flexible.
program, designed by the United States Department of Education
to spur reforms in state and local district K-12 education.
The German Federal Ministry of Education and Research likewise has initiated a program called InnoRegio to reward innovative practices.
issue made it a key battleground for competition for leadership, particularly between the European Commission
and the European Council of Ministers. The result has been a protracted battle over agenda setting and issue framing and a cycle of competitive regulatory reinforcement.
states for power, control, popular support and legitimacy in the eyes of the public has been described as competitive governance.
While during the Cold War
security was provided by centralized institutions such as NATO and the Warsaw Pact
, now competing profit-seeking firms provide personal, national, and international security.
notes, "In democratic government, people take jurisdictions as given, and they elect leaders. In competitive government, people take leaders as given, and they select jurisdictions." Competitive governance has thus far not produced an ultra-libertarian government; although Zac Gochenour has pointed out the role of potential international migrants' switching costs in hindering consumer choice from creating greater intergovernmental competition, Bryan Caplan
has stated that "[t]he bigger problem is that almost all existing governments are either non-profits (the democracies), have short time horizon
s (the unstable dictatorships), or reasonably worry that if they liberalize they're lose power (the stable dictatorship
s)." Indeed, it has been argued by Maria Brouwer that most autocracies prefer stagnation to the vagaries inherent to expansion and other forms of innovation, since the exploration of new possibilities could lead to failure, which would undermine autocratic authority. There has been some question as to whether competitive governance can be revived in Australia
.
Advantages
Brennan and Buchanan (1980) argue that the public sector is a 'Leviathan
' which is inherently biased towards extracting money from taxpayers, but that competitive government structures can minimize such exploitation. It has also been argued that a decentralized competitive government structure allows for an experimentation of new public policies without doing too much harm if they fail.
Disadvantages
An alternative to market-based or competitive governance is civic-based or partnership governance. Alleged disadvantages of competitive governance, compared to collaborative government, include less potential to harness the power of knowledge sharing, cooperation and collaboration within government.
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
, economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and politics
Politics
Politics is a process by which groups of people make collective decisions. The term is generally applied to the art or science of running governmental or state affairs, including behavior within civil governments, but also applies to institutions, fields, and special interest groups such as the...
concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction. Regulatory competition depends upon the ability of actors such as companies, workers or other kinds of people to move between two or more separate legal systems. Once this is possible, then the temptation arises for the people running those different legal systems to compete to offer better terms than their "competitors" to attract investment. Historically, regulatory competition has operated within countries having federal systems of regulation - particularly the United States of America, but since the mid-20th century and the intensification of economic globalisation, regulatory competition became an important issue internationally.
The dominant opinion is that regulatory competition between jurisdictions creates a "race to the bottom
Race to the bottom
A race to the bottom is a socio-economic concept that is argued to occur between countries as an outcome of regulatory competition, progressive taxation policies and social welfare spending...
" in standards, due to the decreased ability of any jurisdiction to enforce standards without the cost of driving investment abroad. A small group of advocates say that regulatory competition in fact creates a "race to the top" in standards, due to the ability of different actors to select the most efficient rules by which to be governed. The main fields of law affected by the phenomenon of regulatory competition are corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
, labour law
Labour law
Labour law is the body of laws, administrative rulings, and precedents which address the legal rights of, and restrictions on, working people and their organizations. As such, it mediates many aspects of the relationship between trade unions, employers and employees...
, tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
and environmental law
Environmental law
Environmental law is a complex and interlocking body of treaties, conventions, statutes, regulations, and common law that operates to regulate the interaction of humanity and the natural environment, toward the purpose of reducing the impacts of human activity...
.
History
The concept of regulatory competition emerged out of the late 19th and early 20th century experience with charter competition among US states to attract corporations to domicile in their jurisdiction. In 1890 New JerseyNew Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
enacted a liberal corporation charter, which charged low fees for company registration and lower franchise tax
Franchise tax
Franchise tax is a tax charged by some US states to corporations with a nexus with those states. The common feature of a state's franchise tax is that it is not based on income...
es than other states. Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
attempted to copy the law to attract companies to its own state. This competition ended when Woodrow Wilson
Woodrow Wilson
Thomas Woodrow Wilson was the 28th President of the United States, from 1913 to 1921. A leader of the Progressive Movement, he served as President of Princeton University from 1902 to 1910, and then as the Governor of New Jersey from 1911 to 1913...
as Governor tightened New Jersey's laws again through a series of seven statutes.
In academic literature the phenomenon of regulatory competition reducing standards overall was argued for by AA Berle and GC Means in The Modern Corporation and Private Property
The Modern Corporation and Private Property
The Modern Corporation and Private Property is a book written by Adolf Berle and Gardiner Means published in 1932. It explores the evolution of big business through a legal and economic lens, and argues that in the modern world those who legally have ownership over companies have been separated...
(1932) while the concept received formal recognition by the US Supreme Court in a decision of Justice Louis Brandeis
Louis Brandeis
Louis Dembitz Brandeis ; November 13, 1856 – October 5, 1941) was an Associate Justice on the Supreme Court of the United States from 1916 to 1939.He was born in Louisville, Kentucky, to Jewish immigrant parents who raised him in a secular mode...
in the 1933 case Ligget Co. v. Lee In 1932 Brandeis also coined the term “laboratories of democracy
Laboratories of Democracy
Laboratories of democracy is a concept that defines the system of federalism within the United States. This concept explains how within the federal framework, there exists a system of filtration of governments...
” in New State Ice Company v. Liebmann, noting that the Federal government was capable of ending experiment.
Corporate law
American corporate law scholars have debated on the role of the regulatory competition on corporate law for more than one decade. A Comparative BibliographyIn the United States legal academia, corporate law is conventionally said to be the product of a "race" among states to attract incorporations by making their corporate laws attractive to those who choose where to incorporate. Given that it has long been possible to incorporate in one state while doing business primarily in other states, US states have rarely been able or willing to use law tied to where a firm is incorporated to regulate or constrain corporations or those who run them. However, U.S. states have long regulated corporations with other laws (e.g., environmental laws, employment laws) that are not tied to where a firm is incorporated, but are based on where a firm does business.
From the "race" to attract incorporations, Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
has emerged as the winner, at least among publicly traded corporations. The corporate franchise tax
Franchise tax
Franchise tax is a tax charged by some US states to corporations with a nexus with those states. The common feature of a state's franchise tax is that it is not based on income...
accounts for between 15% and 20% of the state's budget.
In Europe, regulatory competition has long been prevented by the real seat doctrine prevailing in private international law of many EU and EEA
European Economic Area
The European Economic Area was established on 1 January 1994 following an agreement between the member states of the European Free Trade Association and the European Community, later the European Union . Specifically, it allows Iceland, Liechtenstein and Norway to participate in the EU's Internal...
member countries, which essentially required companies to be incorporated in the state where their main office was located. However, in a series of cases between 1999 and 2003 (Centros Ltd. vs. Erhvervs- og Selskabsstyrelsen, Überseering BV v Nordic Construction Company Baumanagement GmbH, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd.), the European Court of Justice
European Court of Justice
The Court can sit in plenary session, as a Grand Chamber of 13 judges, or in chambers of three or five judges. Plenary sitting are now very rare, and the court mostly sits in chambers of three or five judges...
has forced member states to recognize companies chartered in other member states, which is likely to foster regulatory competition in European company law
European company law
European company law is an emerging field of legal scholarship, which concerns the formation, operation and insolvency of corporations within the European Union. There is presently no substantive European company law as such, although a host of minimum standards are applicable to companies...
. For instance, in 2008, Germany adopted new regulations on the GmbH (Limited Liability Company), allowing the incorporation of Limited Liability Companies without a minimum capital of EUR 25,000 (though the earnings have to be retained until this threshold is reached).
Labour law
Countries may, for instance, seek to attract foreign direct investmentForeign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
by enacting a lower minimum wage
Minimum wage
A minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about...
than other countries, or by making the labor market more flexible.
- International Transport Workers Federation v Viking Line ABPInternational Transport Workers Federation v Viking Line ABPThe Rosella or International Transport Workers Federation v Viking Line ABP [2008] IRLR 143 is an EU law case, relevant to all labour law within the European Union, including UK labour law, which held that there is a positive right to strike...
or The Rosella [2008] IRLR 143 (C-438/05
Education
Sometimes higher-level governing bodies institute incentives to competition among lower-level governing bodies, an example being the Race to the TopRace to the Top
Race to the Top, abbreviated R2T, RTTT or RTT, is a $4.35 billion United States Department of Education competition designed to spur innovation and reforms in state and local district K-12 education...
program, designed by the United States Department of Education
United States Department of Education
The United States Department of Education, also referred to as ED or the ED for Education Department, is a Cabinet-level department of the United States government...
to spur reforms in state and local district K-12 education.
The German Federal Ministry of Education and Research likewise has initiated a program called InnoRegio to reward innovative practices.
Health
The high degree of politicization of the genetically modified organismGenetically modified organism
A genetically modified organism or genetically engineered organism is an organism whose genetic material has been altered using genetic engineering techniques. These techniques, generally known as recombinant DNA technology, use DNA molecules from different sources, which are combined into one...
issue made it a key battleground for competition for leadership, particularly between the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
and the European Council of Ministers. The result has been a protracted battle over agenda setting and issue framing and a cycle of competitive regulatory reinforcement.
Security
The struggle between insurgents and various AfghanistanAfghanistan
Afghanistan , officially the Islamic Republic of Afghanistan, is a landlocked country located in the centre of Asia, forming South Asia, Central Asia and the Middle East. With a population of about 29 million, it has an area of , making it the 42nd most populous and 41st largest nation in the world...
states for power, control, popular support and legitimacy in the eyes of the public has been described as competitive governance.
While during the Cold War
Cold War
The Cold War was the continuing state from roughly 1946 to 1991 of political conflict, military tension, proxy wars, and economic competition between the Communist World—primarily the Soviet Union and its satellite states and allies—and the powers of the Western world, primarily the United States...
security was provided by centralized institutions such as NATO and the Warsaw Pact
Warsaw Pact
The Warsaw Treaty Organization of Friendship, Cooperation, and Mutual Assistance , or more commonly referred to as the Warsaw Pact, was a mutual defense treaty subscribed to by eight communist states in Eastern Europe...
, now competing profit-seeking firms provide personal, national, and international security.
Theory
Arnold KlingArnold Kling
Arnold Kling is a founder and co-editor of , an economics blog, along with Bryan Caplan and David Henderson.Kling graduated from Swarthmore College in 1975 and received a Ph.D. in economics from Massachusetts Institute of Technology. He worked as an economist in the Federal Reserve System from 1980...
notes, "In democratic government, people take jurisdictions as given, and they elect leaders. In competitive government, people take leaders as given, and they select jurisdictions." Competitive governance has thus far not produced an ultra-libertarian government; although Zac Gochenour has pointed out the role of potential international migrants' switching costs in hindering consumer choice from creating greater intergovernmental competition, Bryan Caplan
Bryan Caplan
Bryan Caplan is an American economist, a Professor of Economics at George Mason University, Research Fellow at the Mercatus Center, adjunct scholar of the Cato Institute, and blogger for Econlog. He is best known for his work in public choice theory and for his libertarian ideology.-Personal...
has stated that "[t]he bigger problem is that almost all existing governments are either non-profits (the democracies), have short time horizon
Time horizon
A time horizon, also known as a planning horizon, is a fixed point of time in the future at which point certain processes will be evaluated or assumed to end. It is necessary in an accounting, finance or risk management regime to assign such a fixed horizon time so that alternatives can be...
s (the unstable dictatorships), or reasonably worry that if they liberalize they're lose power (the stable dictatorship
Stable dictatorship
A stable dictatorship is a dictatorship that is able to remain in power for long periods. The stable dictatorship theory concerning the Soviet Union held that after the succession crisis following Joseph Stalin's death, the victorious leader assumed the status of a Stalinist dictator without...
s)." Indeed, it has been argued by Maria Brouwer that most autocracies prefer stagnation to the vagaries inherent to expansion and other forms of innovation, since the exploration of new possibilities could lead to failure, which would undermine autocratic authority. There has been some question as to whether competitive governance can be revived in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
.
Advantages
Brennan and Buchanan (1980) argue that the public sector is a 'Leviathan
Leviathan
Leviathan , is a sea monster referred to in the Bible. In Demonology, Leviathan is one of the seven princes of Hell and its gatekeeper . The word has become synonymous with any large sea monster or creature...
' which is inherently biased towards extracting money from taxpayers, but that competitive government structures can minimize such exploitation. It has also been argued that a decentralized competitive government structure allows for an experimentation of new public policies without doing too much harm if they fail.
Disadvantages
An alternative to market-based or competitive governance is civic-based or partnership governance. Alleged disadvantages of competitive governance, compared to collaborative government, include less potential to harness the power of knowledge sharing, cooperation and collaboration within government.
See also
- International economicsInternational economicsInternational economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them...
- International lawInternational lawPublic international law concerns the structure and conduct of sovereign states; analogous entities, such as the Holy See; and intergovernmental organizations. To a lesser degree, international law also may affect multinational corporations and individuals, an impact increasingly evolving beyond...
- Charter cityCharter cityA charter city is a city in which the governing system is defined by the city's own charter document rather than by state, provincial, regional or national laws. In locations where city charters are allowed by law, a city can adopt or modify its organizing charter by decision of its administration...
- Corporate havenCorporate havenA corporate haven is a jurisdiction with laws friendly to corporationsthereby encouraging them to choose that jurisdiction as a legal domicile.- History :...
- Tax havenTax havenA tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
- SeasteadingSeasteadingSeasteading is the concept of creating permanent dwellings at sea, called seasteads, outside the territories claimed by the governments of any standing nation....
- Jurisdictional arbitrageJurisdictional arbitrageJurisdictional arbitrage is the practice of taking advantage of the discrepancies between competing legal jurisdictions. It takes its name from arbitrage, the practice in finance of purchasing a good at a lower price in one market and selling it at a higher price in another...
- Indices of economic freedomIndices of Economic FreedomThe annual survey Economic Freedom of the World is an indicator produced by the Fraser Institute, a Canadian think tank which attempts to measure the degree of economic freedom in the world's nations. This indicator has been used in peer-reviewed studies some of which have found a range of...
- Lists of countries by GDP per capita