Private Politics and Public Regulation

Abstract

Public regulation is increasingly facing competition from private politics, in the form of activism or corporate self-regulation. But when is private politics enough, efficient, or better than public regulation? This paper presents a unified dynamic framework for studying the interaction between public regulation, self-regulation, and boycotts. We show that the possibility of self-regulation saves on administrative costs, but also leads to delays. Without an active regulator, activists boycott to encourage self-regulation, firms self-regulate to preempt or end a boycott, and private politics is beneficial for activists but harmful for firms. With an active regulator, in contrast, activists boycott to encourage public regulation, firms self-regulate to preempt public regulation, and private politics is harmful for activists but beneficial for firms. Our analysis generates a rich set of testable predictions regarding the regulatory outcomes and the delays, such as the duration of boycotts.