Point of Intervention Strategy

One approach for a regulatory manager is to consider the point of intervention. A useful conceptualization for such a strategy has been developed by Cary Coglianese, in collaboration with others. It divides options into management-, technology- and performance-based regulation.

Management-based regulation

Management-based regulation is regulatory intervention that takes place at the regulated firm’s planning phases of projects. This is a new conceptualization of regulatory categories that may warrant attention. It is suggested that management-based regulation can be distinguished from technology- and performance-based regulation, both by the phase in the work process that the regulatory intervention takes place, and by the optimum conditions for using each regulatory method. Technology-based reglation intervenes in the production process, while performance-based regulation intervenes in the outcomes of the regulatee. (See discussion of these approaches in this toolkit). Performance-based regulation tends to be thought of as more market-oriented, but management-based regulation can provide market-driven benefits as well.

Management-based regulation precedes both the other approaches. It intervenes in the planning phase, to determine the maximum achieve of stipulated social goals. Management-based regulation, by intervening earlier in the process, can reduce the need for performance-based regulation; while sharing the latter’s superior incentive for innovation that is generally retarded by technology-based regulation. Some examples of management-based regulation are requirements for the regulatee to be able to have plans for identification of hazards, risk mitigation actions, procedures for monitoring and correcting problems, employee training, evaluating and refining the firm’s management with respect to the stated social objective. Such plans may be subject to approval by regulators. Similarly, firms may be required to produce documentation of compliance with their plans, or be subject to reviews by regulators or third-party auditors to certify compliance.

Management-based regulation is best suited to circumstances where both the capacity to assess output and the homogeneity of regulated entities are low. (Where capacity to assess outputs are high, performance-based regulation is preferred; where the homogeneity of entities is high, technology-based regulation is preferred.) It is often beneficial to employ a combination of tools from the different phase-specific approaches.

Cary Coglianese, "Policies to promote systematic environmental management," in C. Coglianese and J. Nash (eds.), Regulating from the Inside: Can Environmental Management Systems Achieve Policy Goals? (Washington, D.C.: Resources for the Future Press, 2001).

Coglianese, Cary, et al. "Management-based regulation: Prescribing private management to achieve public goods.," Law and Society Review, 37 2003, 691-730

The authors provide an overview of the benefits and challenges of management-based regulation, in contrast to the more popular technology- and performance-based approaches. Unlike these latter approaches, which entail regulator intervention in the process or outcome phases of production respectively, management-based regulation intervenes at the planning phase: ensuring the optimum organization of resources for the best social outcome.

Chau, V.S. , and B.J. Witcher, "Implications of regulation policy incentives for strategic control: An integrative model," Annals of Public and Cooperative Economics, 76(1) March 2005, 85-120

The authors propose an internal management perspective of the company, as a complement to longstanding principal-agency theory, for understanding the interchange between regulator and company. They consider how two utility companies have managed regulatory objectives alongside organizational ones in electricity distribution and gas transportation and suggest a new integrative model of strategic control for understanding utility management. They conclude with an emphasis on the importance of regulators understanding company’s internal management.

Technology-based regulation

Technology-based regulation, using the word technology broadly to refer to systems and behaviour as well as machines, is what is usually called command and control regulation: the regulation specifies precisely what kind of technology must be in place to be in compliance. This regulation intervenes in the actual process of production or work. It is highly proscriptive and has the merits of clearly defining the stipulated social objectives and how they are to be met. It is criticized for being too rigid for the regulator, too costly for the regulatee and inhibiting technical innovation that could achieve the same objectives at lesser cost to the regulatee and society generally.

Technology-based regulation is best suited to circumstances where the homogeneity of regulated entities is high, allowing better affect from a standardized approach. (Where homogeniety of regulated entites is low, but the capacity to assess outputs is high, performance-based regulation is preferred; where both the homogeniety of regulated units and the capacity to assess outputs are low, management-based regulation is preferred.) It is often beneficial to employ a combination of tools from the different phase-specific approaches.

For further discussion of technology-based regulation, in addition to the references for "management-based regulation" above, see the discussion and sources for "Fines and Punishments," in the Corrections sections of the Theoretical toolkit.

Performance-based regulation

Usually associated with market-oriented approaches, performance-based regulation is based on a specification of acceptable outputs by regulatees. This allows for more flexible and nimble responses to regulatory requirements. This is perceived as more beneficial in several ways: it encourages technical innovation, as opposed to the command and control approach that dictates specific technical measures thereby reducing the motivation for the market to develop new innovations; it allows regulated firms to find the means to achieve the regulatory requirements in ways that are least costly or harmful to the firm’s specific market and fiscal circumstances; it reduces the motive and means for the creative complicance that fulfils the letter of a regulation while undermining its intent; and it relieves the regulator of the weighty and unrealistic burden of dictating correct specific technical solutions to a range of countless industries and firms, requiring an impractical and excessively expensive body of expert knowledge.

Those who have criticized performance-based regulation have suggested that without proper accountability it could leave the regulatees with too much discretion to act in manners that serve their interest over that of the public good. Also, if not properly supervised the means chosen to achieve the regulatory requirements could wind up doing as much harm as that which the regulatory requirements were originally intended to prevent.

Performance-based regulation is best suited to circumstances where the capacity to assess outputs is high, allowing for effective standards determination and monitoring. (Where the capacity to assess outputs is low, but the homogeniety of regulated entites is high, technology-based regulation is preferred; where both the homogeniety of regulated units and the capacity to assess outputs are low, management-based regulation is preferred.) It is often beneficial to employ a combination of tools from the different phase-specific approaches.

Bradley Karkkainen, "Information as environmental regulation: TRI, performance benchmarking, precursors to a new paradigm?" Georgetown Law Journal, 89, 2001.

Coglianese, Cary, et al. "Peformance-based regulation: Prospects and limitations in health, safety, and environmental protection.," Administrative Law Review, 55(4) fall 2003, 705-724

This article reports on the discussions at the workshop of the Regulatory Policy Program at Harvard University. The pros and cons of performance-based regulation were discussed.

May, Peter J., "Performance-based regulation and regulatory regimes: The saga of leaky buildings.," Law and Policy, 25(4) October 2003, 381-401

This is a cautionary piece, warning that the results-based orientation of performance-based regulation fails in the absence of rigorous accountability. The case study of the regulated construction of leaky buildings in New Zealand illustrates the warning. Performance-based regulation makes more nuanced, but hardly eliminates, regulatory-capture. Relying on the self-correcting influences of the marketplace can be the Achilles Heel of accountability-weak performance-based regulation.