Varieties of regulatory regimes and their effect on citizens’ trust in firms

Abstract

ABSTRACT The regulation of market activity has been largely dominated by governmental command-and-control regulatory design (C&C), which was seen as the safest way to protect the public from potential harm by firms. In recent years, in an effort to move to more relaxed and less burdensome regulation, alternative regulatory tools have been developed, tools that rely on firms or other private actors in the various stages of regulation (self, or smart, regulation). Since these alternatives present a reduction in the extent to which the government regulates markets, they could have a negative impact on citizens’ trust in firms and willingness to use them, especially when it comes to new technologies that could pose a risk to users. Using two experimental surveys (n = 1,195), we examine the extent to which different regulatory designs affect citizens’ willingness to trust a firm in the field of financial technologies (Fintech). The results show that trust in the firm decreases with alternatives to traditional state regulation. However, when trust in the regulator is high, then trust in the regulated firm increases even when an altentaive to C&C is introduced and the regulator relies on pledges, suggesting that the path to relieving regulatory burden lies in increasing the trustworthiness of public regulators.