Regulation as a Prisoner's Dilemma
This is the sort of thing I wrote about in my latest book.
The Prisoners Dilemma as outlined above can be seen in action in two variants within regulatory activities, and offers a clear insight into why those involved in regulation act as they do. The first relationship is that between the various people and organisations being regulated banks, nuclear power stations, council departments, police agencies, journalists, etc, and the clear lessons from history are that even for those organisations that are theoretically in competition with each other, it is beneficial to both/all sides in the long run to use mutual cooperation in order to maximise their personal benefit. Whether it was Virgin and British Airways forming an illegal cartel to fix the price of fuel surcharges (a benefit to themselves which was paid for in increased prices for passengers); football shirt retailers (and Manchester United) being fined £16m for fixing the price of replica football shirts, or Barclays (and undoubtedly other banks) working together to fix the LIBOR rate, the reason why they do it is simple and unanswerable -- it is in their benefit to do so.
However, when it comes down to the relationship between the regulators and those being regulated, then a completely different strategic dynamic comes into play. The ability of the regulated organisation to maximise personal benefit is then based on the ability to predict what the other side will do in response to the two options cooperate (play nicely) or betray (screw the customer). Given that in almost all cases the regulatory body has less funds, personnel, resources and expertise than the organisation it is regulating, then it becomes clear that there is little to be gained in the long run by cooperating / playing nicely, and much to be gained by ignoring the regulator and developing a strategy that focuses purely on maximising its own personal benefit. This is not an issue of 'right' or 'wrong,' but purely, in its own terms at least (maximisation of profit, increased market share, annual bonuses, career prospects), of whether it is 'effective' or 'ineffective.'
Posted on November 7, 2012 at 6:16 AM • 23 Comments