"Then let's have a dialogue": Interdependence and negotiation in a cohesive regulatory system

Abstract

Public and private organizations deal closely with each other on regulatory issues. Newer forms of regulation rely on shared enforcement and supervisory responsibilities, regulatory negotiation, and other methods that try to get beyond remote public commands while maintaining effective public involvement. This article examines how regulators and firms deal with each other, the interdependence that forms between them in the course of their work, and the benefits and liabilities of the strong ties that may develop out of this interdependence. We use the securities industry as a context for discussion but indicate that the points apply more generally. We pay special attention to the potential benefits and risks of cohesive regulatory networks. Regular dealings among regulators and firms outside of regular rulemaking or enforcement proceedings enhance cooperation, reduce information disparities, strengthen regulatory cultures, and arguably lower the threshold of external pressure required to effect changes within firms. The conditions enhancing these benefits, however, also will restrict the flow of information, perspectives, and criticism from outsiders, potentially leading to erosion of performance standards and eventually serious problems. We describe the circumstances under which these tensions are more likely to be managed without damage from these problems and the broader implications for research and teaching in public management and policy.