Drift and Adjustment in Organizational Rule Compliance: Explaining the 'Regulatory Pendulum' in Financial Markets

Organization Science, 25(2):321-338, March-April 2014, DOI: org/10.1287/orsc.2013.0847

37 Pages Posted: 12 May 2013 Last revised: 10 Jan 2017

See all articles by Ignacio J. Martinez-Moyano

Ignacio J. Martinez-Moyano

Argonne National Laboratory; University of Chicago - Computation Institute

David P. McCaffrey

University at Albany, SUNY

Rogelio Oliva

Mays Business School, Texas A&M University

Date Written: 2014

Abstract

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, while 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, and non-salient risks. It describes systemically how organizations attend to rules depending on the nature of the benefits of production compared to 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.

Keywords: Rule Change, Rule Compliance, Internal and External Regulation, Standards Erosion, Complex Systems Analysis, Qualitative Analysis, Organizational Processes, Financial Markets

Suggested Citation

Martinez-Moyano, Ignacio J. and McCaffrey, David P. and Oliva, Rogelio, Drift and Adjustment in Organizational Rule Compliance: Explaining the 'Regulatory Pendulum' in Financial Markets (2014). Organization Science, 25(2):321-338, March-April 2014, DOI: org/10.1287/orsc.2013.0847. Available at SSRN: https://ssrn.com/abstract=2263475

Ignacio J. Martinez-Moyano

Argonne National Laboratory ( email )

9700 S. Cass Avenue
Argonne, IL 60439
United States

HOME PAGE: http://www.dis.anl.gov/

University of Chicago - Computation Institute ( email )

5735 South Ellis Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.ci.uchicago.edu/people/profile.php?id=938

David P. McCaffrey

University at Albany, SUNY ( email )

7 Avila Road
Santa Fe, NM 87508
United States
518-257-2831 (Phone)

Rogelio Oliva (Contact Author)

Mays Business School, Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4218
United States

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