Contracts

Contracts are regulatory tools that specify public interests as intended ends, but allow for more nuanced, customized delineation of means to achieve those desired ends. Rather than the standardized, one-size-fits-all, approach associated with command-and-control regulation, which in many instances are recipes for failure, negotiated contracts between regulator and regulated allow the working out of solutions that are both socially optimal and practically implementable. The tools in this category are further subdivided into those contracts that are between the regulator and regulated, on a one-to-one basis, and those that engage multiple regulated and/or regulators in a system of contractual webs that establish the regulatory context. The effectiveness of all such contracts, however, requires effective monitoring and accountability frameworks.

Organizationally Specific

Regulatory Reform Contracts

This tool is a program under a new statute that authorizes agencies to accept offers from the regulated to comply with a set of regulatory obligations different from the obligations defined by existing law, as long as “equal social benefits” would result. The statute should specify the types of obligations that could be traded and perhaps set other conditions. The statute would also subject all such contracts to public comment and limited judicial review.

Pederson, William F., "Contracting with the regulated for better regulation," Administrative Law Review, 53(4) Fall 2001, 1067-1138

While endorsing what he perceives as an “almost universal consensus” on the design and operational inefficiency of U.S. environmental, health and safety regulation, the author says that these criticisms miss the deepest cause of regulatory malaise and overlook the best suited reform for that malaise. He argues that failures to distinguish between the ends a regulatory program seeks, and means it employs, along with the failure to prioritize among competing ends, constitutes a major cause of regulatory dysfunction. Under these conditions it becomes nearly impossible to measure performance and identify success or failure. As a remedy, he proposes “regulatory reform contracts.” These contracts would enable agencies to accept offers from the regulated to comply with a set of regulatory obligations different from the obligations defined by existing law, as long as “equal social benefits” would result. In addition to providing a specifically tailored means to achieve a clearly focused end, such contracts would be subject to public comment and limited judicial review. Also, such contracts’ dialogic character dovetails with the arguments in favour of regulatory co-management and cooperation. The “negotiation” dimension of Pedersen’s proposed regulatory reform contracts opens up the discussion to the larger field of alternative regulatory approaches.

Relational Agreements

Relational agreements reached between regulator and regulated establish a custom or understanding in relation to a contract, where the contract is vague, ambiguous or silent on an important point. Such contracts, or sub-contracts, allow the regulatory objective to be achieved in a more flexible context, which takes into account price or quality concerns, without having to call into question the entire framing context of existing regulatory agreements.

Kovacic, William E., "Law, economics, and the reinvention of public administration: Using relational agreements to reduce the cost of procurement regulation and other forms of government intervention in the economy," Administrative Law Review, 50(1) Winter 1998, 141-156

The author uses the example of procurement regulation to suggest how insights of economics literature relevant to public administration can inform the design of legal rules and the institutions entrusted with applying them. He considers how reinvention reforms, adopted under the Clinton administration, have failed to establish conditions necessary to achieve the goal of creating commercial-style partnerships between government and its suppliers. In particular, he focuses on how the existing scheme of procurement regulation discourages the use of relational understandings between government and its suppliers to reduce the diverse effects of imperfect statutory and regulatory commands.

Voluntary Agreements

The tools of voluntary agreements can be categorized into two types: first, those that induce participation by providing positive incentives such as cost-sharing or other subsides (the carrot approach) and second, those that induce participation by threatening a harsher outcome (e.g., legislation) if a voluntary agreement is not reached (the stick approach). Though, obviously, the latter is not strictly voluntary, background threats of legislation are behind many successful voluntary agreements.

Benefits of this tool are that it encourages proactive cooperative approaches from industry, reducing regulatory conflicts; offers greater flexibility for finding cost-effective solutions, tailored to specific conditions; and is more expedient due to decreased red tape lags.

Wu, JunJie, and Bruce A. Babcock, "The relative efficiency of voluntary vs. mandatory environmental regulations," Journal of Environmental Economics and Management, 38(2) September 1999, 158-175

Focusing on the context of agriculture, the authors compare voluntary and mandatory approaches to regulating environmental protection. In the voluntary model, agricultural producers adopt a land conservation practice with the government providing technical and financial assistance. The authors argue that such a program is more efficient than a mandatory program if the deadweight losses of government expenditures under the voluntary program are less than the difference between private and public costs of government services plus the additional implementation costs of the mandatory program. They also consider the circumstances under which those conditions are likely to be met

Segerson, Kathleen, and Thomas J. Miceli, "Voluntary environmental agreements: Good or bad news for environmental protection," Journal of Environmental Economics and Management, 36(2) September 1998, 109-130

The authors evaluate the effectiveness of voluntary agreements as instruments of environmental regulation. They look at both carrot and stick incentives to voluntary participation in regulatory objectives: threat of mandatory regulation and promise of cost-sharing subsidies. Their conclusions are mixed, suggesting that success depends on a variety of factors including the allocation of bargaining power, the magnitude of the threat and the social cost of funds.

Systemic

Lex Constructionionis

This tool is focused on creating an effective regulatory context for large international, particularly infrastructural, projects. This approach treats the international contract not merely as a commercial instrument, but as an instrument for regulating operations in the interest of the public good. Often in such international contexts, with diverse jurisdictional influences, it is only the contract between the parties that offers the opportunity for formalizing and institutionalizing the regulative demands necessary to meet the interests of the public good. By establishing complex webs of such contracts, woven around any particular enterprise, it is possible to create a regulatory fabric to support and guide their planning and implementation.
Journal of Law and Society, Special section "New Directions in Regulatory Theory", 29(1) March 2002, 137-162

Regulatory Harmonization

Regulatory harmonization refers to processes by which the regulatory regimes and practices within different national contexts are brought into line with one another through multilateral contracts establishing the operation of international bodies and agreements (e.g., WTO, NAFTA, EU). Such harmonization is regarded in a number of complex ways. Some see it as the loss of national sovereignty to these international agents. Still others regard this loss, or pooling, of sovereignty as the intention of national governments that freely enter into such arrangements, enabling them to tame domestic institutional and popular opposition to the substantive objectives. Some promote or criticize harmonization as the conditions for achieving greater internationalization of trade and commerce in keeping with neo-liberal objectives. While others regard the harmonization of cross-national regulatory regimes as gradually recreating the conditions for a return to interventionist/Keynesian policy, which had been lost at the level of national sovereignty with the entering of the international agreements.

Lewis, Graham, and John Abraham, "Making harmonization work: The politics of scientific expertise in European medicines regulation," Science and Public Policy, 25(3) June 1998, 155-169

The authors question the impact of harmonization on scientifically sound regulatory practices. They examine the underlying dynamics that have facilitated successful regulatory harmonization in European medicines. A convergence of institutional interests of national regulatory agencies and the medicine industry, they argue, has led regulators to seek compromise and consensus, resulting in rapid drug approvals. This new system, “mutual recognition,” involves national regulators competing for regulatory work; it extends, but perhaps undermines, peer review; and diminishes the role of national expert science advisors in member states. Consequently, the authors argue, an important form of independent peer review is being compromised in this regulatory harmonization.