Private Politics and Public Regulation

Abstract

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 paper 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 US, while public regulation continues to be more common in Europe.

Keywords: Private politics, boycotts, war of attrition, activism, regulation, self-regulation, corporate social responsibility (CSR)

JEL Classification: D78, L31, L51