New Approaches to Regulatory Enforcement
New Horizons in Law and Economics series
Chapter 1: Introduction
Most of the economic activity in modern societies is conducted through business corporations. Given the profound impact of corporate activity on the entire society, corporate misconduct comprises a significant threat to social welfare. Imprudent or irresponsible corporate actions may harm a wide group of people, both economically and physically. Hence, despite recent “free market” global trends, governments in modern societies hold a central position in directing and controlling corporate activity. In an attempt to promote societal goals, and broadly protect the interests of society, governments issue a wide range of regulations with the aim of establishing the necessary rules of conduct required to engender a socially desirable state of affairs. The enforcement of regulations is a key aspect of every regulatory system. The social value of regulations is contingent, first and foremost, on the desirability of the standards of behavior dictated by them. Nevertheless, the promulgation of socially desirable standards of behavior does not guarantee their positive impact on society. To attain socially desirable ends, regulations must be adequately enforced, while the particularities of the regulatory ecology are taken into consideration. For instance, as opposed to the enforcement of traditional criminal law (e.g., murder, burglary), the enforcement of regulations cannot be blind to potential positive externalities of regulated activities. If excessively enforced, regulatees may either avoid socially desirable activities or employ excessive (costly) precautions to the detriment of social welfare.