Politics and the Regulation of Business
Why may government regulation be a useful complement to business self-regulation in the financial services industry, while largely unneeded or even detrimental for e-commerce? We develop a game-theoretic model wherein a government establishes a mandate for product quality without possessing effective enforcement abilities, and a firm chooses whether to ignore, comply with, or exceed the government quality standard. After bringing a product to market, the firm faces the possibility of political or interest group reactions, such as being the focus of a lawsuit or activist campaign. Equilibrium results show how the threat of lawsuits or interest group activism can complement governmental regulations to discipline the choices of businesses. The model establishes conditions under which certain types of firms in certain environments react favorably or unfavorably to government regulations.