The Limits of Business Self-Regulation

While business self-regulation is often invoked as an alternative to government regulation, it has never lived up to its promise. This article contends that the “undersupply” of business self-regulation is due to the fact that its benefits typically take the form of public goods. It is notorious that public goods, because they are vulnerable to free-rider problems, are inefficiently supplied by the market. Ironically, then the principal means that we rely on to regulate business—the market—undercuts business’s capacity for self-regulation in cases of market failure. Moreover, the extreme fragmentation of business in the U.S. and the barriers we have placed in the way of inter-firm collective action have left us heavily dependent on government to regulate market failures. In other societies, collective action by business, typically administered by a peak organization, has provided an alternative to increased government control.