Private Ordering

26 Pages Posted: 15 Mar 2002

Abstract

The sharing of regulatory authority with private actors ("private ordering") has lengthy historical precedent and, in recent years, has been rapidly expanding in scope, domestically and abroad. Nowhere is its expansion as prevalent as in the commercial, financial, and business sector ("commercial private ordering"), such as the recent entrusting by the U.S. government to the Internet Corporation for Assigned Names and Numbers (ICANN), a private nonprofit corporation, with the task of controlling the Internet domain name system and the assignment of Internet protocol numbers, or the entrusting by the Securities and Exchange Commission to the privately organized Financial Accounting Standards Board with the power to promulgate public accounting standards.

Whereas traditional private ordering derives its legitimacy from costly procedural safeguards (essentially the same as those protecting the legitimacy of administrative agency rule-making), the purported legitimacy of commercial private ordering derives from separate premises: that the goal of commercial regulation is efficiency, and that private institutions can operate more efficiently than government by using market incentives to allocate public resources without having to take account of such extraneous matters as the state's legitimacy and the interests of the politicians, legislatures, and special interest groups. Thus, commercial private ordering is thought to be legitimate even when unrestricted by the procedural safeguards by which traditional private ordering derives legitimacy.

This article questions, however, the premise that the only goal of commercial regulation is efficiency. Even in a commercial context, it argues, society sometimes has other regulatory goals; there may, for example, be distributional goals such as fairness. (The reader should note that this article does not purport to resolve whether non-efficiency goals should be included in any given regulatory scheme; it only intends to show that the uncertainty whether non-efficiency goals should be included makes it likely that non-efficiency goals sometimes will be included in regulatory schemes.) Then, commercial private ordering should not be legitimate without safeguarding those goals.

The article also argues that the safeguards by which traditional private ordering derives legitimacy may not be feasible for commercial private ordering. The cost of instituting those safeguards would likely offset any cost saving that motivates commercial private ordering in the first place, thereby undermining its raison d'etre. The article therefore proposes that non-efficiency regulatory goals be safeguarded directly as a less costly way to achieve legitimacy.

In connection with its analysis, the article finds that most of the literature concerning private ordering either discusses the subject using amorphous generalities or else focuses on specific examples of private ordering without considering their place within the subject's overall framework. The amorphous approach deters rigorous analysis, while the focus on specific examples does not easily allow a reader to extrapolate the analysis to other examples of private ordering. The article therefore attempts to classify the types of private ordering in order to provide a framework for its analysis. The classification shows that private ordering is a label applied to a broad range of activities, and that any analysis of private ordering is a function, and therefore should focus on specific types, of those activities.

Suggested Citation

Schwarcz, Steven L., Private Ordering. Northwestern University Law Review, Fall 2002. Available at SSRN: https://ssrn.com/abstract=298409 or http://dx.doi.org/10.2139/ssrn.298409

Steven L. Schwarcz (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7060 (Phone)
919-613-7231 (Fax)

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