Regulatory competition, also called competitive governance or policy competition, is a phenomenon in
law,
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
and
politics
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...
concerning the desire of lawmakers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction. Regulatory competition depends upon the ability of actors such as companies, workers or other kinds of people to move between two or more separate legal systems. Once this is possible, then the temptation arises for the people running those different legal systems to compete to offer better terms than their "competitors" to attract investment. Historically, regulatory competition has operated within countries having federal systems of regulation - particularly the United States, but since the mid-20th century and the intensification of economic
globalisation
Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...
, regulatory competition became an important issue internationally.
One opinion is that regulatory competition in fact creates a "race to the top" in standards, due to the ability of different actors to select the most efficient rules by which to be governed. The main fields of law affected by the phenomenon of regulatory competition are
corporate law,
labour law
Labour laws (also known as labor laws or employment laws) are those that mediate the relationship between workers, employing entities, trade unions, and the government. Collective labour law relates to the tripartite relationship between employee, ...
,
tax and
environmental law
Environmental law is a collective term encompassing aspects of the law that provide protection to the environment. A related but distinct set of regulatory regimes, now strongly influenced by environmental legal principles, focus on the manage ...
. Another opinion is that regulatory competition between jurisdictions creates a "
race to the bottom
Race to the bottom is a socio-economic phrase to describe either government deregulation of the business environment or reduction in corporate tax rates, in order to attract or retain usually foreign economic activity in their jurisdictions. While ...
" in standards, due to the decreased ability of any jurisdiction to enforce standards without the cost of driving investment abroad.
History
The concept of regulatory competition emerged from the late 19th and early 20th century experience with
charter competition among US states to attract corporations to domicile in their jurisdiction. In 1890
New Jersey
New Jersey is a state in the Mid-Atlantic and Northeastern regions of the United States. It is bordered on the north and east by the state of New York; on the east, southeast, and south by the Atlantic Ocean; on the west by the Delaware ...
enacted a liberal corporation charter, which charged low fees for company registration and lower
franchise taxes than other states.
Delaware
Delaware ( ) is a state in the Mid-Atlantic region of the United States, bordering Maryland to its south and west; Pennsylvania to its north; and New Jersey and the Atlantic Ocean to its east. The state takes its name from the adjacent Del ...
attempted to copy the law to attract companies to its own state. This competition ended when
Woodrow Wilson
Thomas Woodrow Wilson (December 28, 1856February 3, 1924) was an American politician and academic who served as the 28th president of the United States from 1913 to 1921. A member of the Democratic Party, Wilson served as the president of ...
as Governor tightened New Jersey's laws again through a series of seven statutes.
In academic literature the phenomenon of regulatory competition reducing standards overall was argued for by AA Berle and GC Means in ''
The Modern Corporation and Private Property
''The Modern Corporation and Private Property'' is a book written by Adolf Berle and Gardiner Means published in 1932 regarding the foundations of United States corporate law. It explores the evolution of big business through a legal and economic ...
'' (1932) while the concept received formal recognition by the
US Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point of ...
in a decision of Justice
Louis Brandeis
Louis Dembitz Brandeis (; November 13, 1856 – October 5, 1941) was an American lawyer and associate justice on the Supreme Court of the United States from 1916 to 1939.
Starting in 1890, he helped develop the "right to privacy" concept ...
in the 1933 case ''
Ligget Co. v. Lee
''Louis K. Liggett Co. v. Lee'', 288 U.S. 517 (1933), is a corporate law decision from the United States Supreme Court..
In his opinion, Justice Brandeis endorsed the theories that state corporate law, and lack of federal standards, enabled a rac ...
'' In 1932 Brandeis also coined the term “
laboratories of democracy Laboratories of democracy is a phrase popularized by U.S. Supreme Court Justice Louis Brandeis in ''New State Ice Co. v. Liebmann'' to describe how "a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social ...
” in ''
New State Ice Company v. Liebmann'', noting that the Federal government was capable of ending experiment.
Private law
Corporate law
American corporate law scholars have debated on the role of the regulatory competition on corporate law for more than one decade
A Comparative BibliographyIn the United States legal academia, corporate law is conventionally said to be the product of a "race" among states to attract incorporations by making their corporate laws attractive to those who choose where to incorporate. Given that it has long been possible to incorporate in one state while doing business primarily in other states, US states have rarely been able or willing to use law tied to where a firm is incorporated to regulate or constrain corporations or those who run them. However, U.S. states have long regulated corporations with other laws (e.g., environmental laws, employment laws) that are not tied to where a firm is incorporated, but are based on where a firm does business.
From the "race" to attract incorporations,
Delaware
Delaware ( ) is a state in the Mid-Atlantic region of the United States, bordering Maryland to its south and west; Pennsylvania to its north; and New Jersey and the Atlantic Ocean to its east. The state takes its name from the adjacent Del ...
has emerged as the winner, at least among publicly traded corporations. The corporate
franchise tax accounts for between 15% and 20% of the state's budget.
In Europe, regulatory competition has long been prevented by the
real seat doctrine prevailing in
private international law
Conflict of laws (also called private international law) is the set of rules or laws a jurisdiction applies to a case, transaction, or other occurrence that has connections to more than one jurisdiction. This body of law deals with three broad t ...
of many
EU and
EEA member countries, which essentially required companies to be incorporated in the state where their main office was located. However, in a series of cases between 1999 and 2003 (Centros Ltd. vs. Erhvervs- og Selskabsstyrelsen, Überseering BV v Nordic Construction Company Baumanagement GmbH, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd.), the
European Court of Justice
The European Court of Justice (ECJ, french: Cour de Justice européenne), formally just the Court of Justice, is the supreme court of the European Union in matters of European Union law. As a part of the Court of Justice of the European Un ...
has forced member states to recognize companies chartered in other member states, which is likely to foster regulatory competition in
European company law
European company law is a part of European Union law, which concerns the formation, operation and insolvency of companies (or corporations) in the European Union. The EU creates minimum standards for companies throughout the EU, and has its own cor ...
. For instance, in 2008, Germany adopted new regulations on the GmbH (Limited Liability Company), allowing the incorporation of Limited Liability Companies
G (haftungsbeschränkt)without a minimum capital of EUR 25,000 (though 25% of earnings have to be retained until this threshold is reached).
Labour law
Countries may, for instance, seek to attract
foreign direct investment
A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct co ...
by enacting a lower
minimum wage
A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. Bec ...
than other countries, or by making the labor market more flexible.
*''
International Transport Workers Federation v Viking Line ABP
''The Rosella'' or ''International Transport Workers Federation v Viking Line ABP'' (2007C-438/05is an EU law case, relevant to all labour law within the European Union, including UK labour law, which held that there is a positive right to strike ...
'' or ''
The Rosella
''The Rosella'' or ''International Transport Workers Federation v Viking Line ABP'' (2007C-438/05is an EU law case, relevant to all labour law within the European Union, including UK labour law, which held that there is a positive right to strik ...
''
008 008, OO8, O08, or 0O8 may refer to:
* The Streetwear Brand @008us , inspired by Ian Fleming & Virgil Abloh
*"030", the fictional 030 Agent of MI6
* '' 038: Operation Exterminate'', a 1965 Italian action film
* '' Explosivo 030'' a 1940 Argentine c ...
IRLR 143
C-438/05
Taxation
*
Tax competition
Tax competition, a form of regulatory competition, exists when governments use reductions in fiscal burdens to encourage the inflow of productive resources or to discourage the exodus of those resources. Often, this means a governmental strategy ...
Environmental law
Legal scholars often cite environmental law as a field in which regulatory competition is particularly likely to produce a “race to the bottom” due to the externalities produced by changes in any individual state's environmental law. Because a state is unlikely to bear all of the costs associated with any environment damage caused by industries in that state, it has an incentive to lower standards below the level that would be desirable if the state were forced to bear all of the costs.
[Berkeley Law](_blank)
/ref> One commonly cited example of this effect is clean air laws, as states may be incentivized to lower their standards to attract business, knowing that the effects of the increased pollution will be spread across a wide area, and not simply localized within the state. Furthermore, a reduction in the standards of one state will incentivize other states to similarly lower their standards so as to not lose business.
Public services
Education
Sometimes higher-level governing bodies institute incentives to competition among lower-level governing bodies, an example being the Race to the Top program, designed by the United States Department of Education
The United States Department of Education is a Cabinet-level department of the United States government. It began operating on May 4, 1980, having been created after the Department of Health, Education, and Welfare was split into the Department ...
to spur reforms in state and local district K-12 education.
The German Federal Ministry of Education and Research
The Federal Ministry of Education and Research (german: link=no, Bundesministerium für Bildung und Forschung, ), abbreviated BMBF, is a cabinet-level ministry of Germany. It is headquartered in Bonn, with an office in Berlin. The Ministry provi ...
likewise has initiated a program called InnoRegio to reward innovative practices.
Health
The high degree of politicization
Politicisation (also politicization; see English spelling differences) is a concept in political science and theory used to explain how ideas, entities or collections of facts are given a political tone or character, and are consequently assigned ...
of the genetically modified organism
A genetically modified organism (GMO) is any organism whose genetic material has been altered using genetic engineering techniques. The exact definition of a genetically modified organism and what constitutes genetic engineering varies, with ...
issue made it a key battleground for competition for leadership, particularly between the European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body o ...
and the European Council of Ministers
The Council of the European Union, often referred to in the treaties and other official documents simply as the Council, and informally known as the Council of Ministers, is the third of the seven Institutions of the European Union (EU) as ...
. The result has been a protracted battle over agenda setting and issue framing and a cycle of competitive regulatory reinforcement.
Security
The struggle between insurgents and various Afghanistan
Afghanistan, officially the Islamic Emirate of Afghanistan,; prs, امارت اسلامی افغانستان is a landlocked country located at the crossroads of Central Asia and South Asia. Referred to as the Heart of Asia, it is bordere ...
states for power, control, popular support and legitimacy in the eyes of the public has been described as competitive governance.
While during the Cold War
The Cold War is a term commonly used to refer to a period of geopolitical tension between the United States and the Soviet Union and their respective allies, the Western Bloc and the Eastern Bloc. The term '' cold war'' is used because the ...
security was provided by centralized institutions such as NATO
The North Atlantic Treaty Organization (NATO, ; french: Organisation du traité de l'Atlantique nord, ), also called the North Atlantic Alliance, is an intergovernmental military alliance between 30 member states – 28 European and two No ...
and the Warsaw Pact
The Warsaw Pact (WP) or Treaty of Warsaw, formally the Treaty of Friendship, Cooperation and Mutual Assistance, was a collective defense treaty signed in Warsaw, Poland, between the Soviet Union and seven other Eastern Bloc socialist republic ...
, now competing profit-seeking firms provide personal, national, and international security.
Theory
Arnold Kling
Arnold Kling (born 1954) is an American economist, scholar, and blogger known for his writings on EconLog, an economics blog, along with Bryan Caplan and David R. Henderson. Kling also has his own blog, askblog, which carries the motto: "taking ...
notes, "In democratic government
Democracy (From grc, δημοκρατία, dēmokratía, ''dēmos'' 'people' and ''kratos'' 'rule') is a form of government in which the people have the authority to deliberate and decide legislation ("direct democracy"), or to choose gover ...
, people take jurisdictions as given, and they elect leaders. In competitive government, people take leaders as given, and they select jurisdictions." Competitive governance has thus far not produced an ultra-libertarian government; although Zac Gochenour has pointed out the role of potential international migrants' switching cost Switching costs or switching barriers are terms used in microeconomics, strategic management, and marketing. They may be defined as the disadvantages or expenses consumers feel they experience, along with the economic and psychological costs of swit ...
s in hindering consumer choice
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
from creating greater intergovernmental competition, Bryan Caplan
Bryan Douglas Caplan (born April 8, 1971) is an American economist and author. Caplan is a professor of economics at George Mason University, research fellow at the Mercatus Center, adjunct scholar at the Cato Institute, and former contributor ...
has stated that " e bigger problem is that almost all existing governments are either non-profit
A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...
s (the democracies), have short time horizon
Time is the continued sequence of existence and events that occurs in an apparently irreversible succession from the past, through the present, into the future. It is a component quantity of various measurements used to sequence events, to co ...
s (the unstable dictatorships), or reasonably worry that if they liberalize they're lose power (the stable dictatorships)." Indeed, it has been argued by Maria Brouwer that most autocracies
Autocracy is a system of government in which absolute power over a State (polity), state is concentrated in the hands of one person, whose decisions are subject neither to external legal restraints nor to regularized mechanisms of popular cont ...
prefer stagnation to the vagaries inherent to expansion and other forms of innovation, since the exploration of new possibilities could lead to failure, which would undermine autocratic authority. There has been some question as to whether competitive governance can be revived in Australia
Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
.
;Advantages
Brennan and Buchanan (1980) argue that the public sector is a ' Leviathan' which is inherently biased towards extracting money from taxpayers, but that competitive government structures can minimize such exploitation. It has also been argued that a decentralized competitive government structure allows for an experimentation of new public policies without doing too much harm if they fail.
;Disadvantages
An alternative to market-based or competitive governance is civic-based or partnership governance. Alleged disadvantages of competitive governance, compared to collaborative government, include less potential to harness the power of knowledge sharing, cooperation and collaboration within government.
See also
* International economics
*International law
International law (also known as public international law and the law of nations) is the set of rules, norms, and standards generally recognized as binding between states. It establishes normative guidelines and a common conceptual framework for ...
*Charter city
In the United States, a charter city is a city in which the governing system is defined by the city's own charter document rather than solely by general law. In states where city charters are allowed by law, a city can adopt or modify its organ ...
*Corporate haven
Corporate haven, corporate tax haven, or multinational tax haven is used to describe a jurisdiction that multinational corporations find attractive for establishing subsidiaries or incorporation of regional or main company headquarters, mostly du ...
* Tax haven
* Seasteading
* Jurisdictional arbitrage
*Indices of economic freedom A number of indicators of economic freedom are available for review. They differ in the methods by which they have been constructed, the purposes to which they have been put, and the conception of economic freedom they embody.
Indices
''Index of E ...
* Lists of countries by GDP per capita
Notes
References
;General
*RL Revesz, 'Federalism and Regulation: Some Generalizations' in DC Esty and D Geradin, ''Regulatory Competition and Economic Integration: Comparative Perspectives'' (New York, OUP 2001) 3-27
*M Carlberg, ''Policy Competition and Policy Cooperation in a Monetary Union'' (1990)
*
* J Brettschneider, Das Herkunftslandlandprinzip und mögliche Alternativen aus ökonomischer Sicht, Auswirkungen auf und Bedeutung für den Systemwettbewerb (Berlin, Duncker & Humblot 2015) {{ISBN, 3428144635
;Corporate law
*AA Berle
Adolf Augustus Berle Jr. (; January 29, 1895 – February 17, 1971) was an American lawyer, educator, writer, and diplomat. He was the author of ''The Modern Corporation and Private Property'', a groundbreaking work on corporate governance, a prof ...
and GC Means, ''The Modern Corporation and Private Property
''The Modern Corporation and Private Property'' is a book written by Adolf Berle and Gardiner Means published in 1932 regarding the foundations of United States corporate law. It explores the evolution of big business through a legal and economic ...
'' (1932)
*WL Cary, 'Federalism and Corporate Law: Reflections upon Delaware' (1974) 83 Yale Law Journal 663
*E von Halle, ''Trusts, or, Industrial Combinations and Coalitions in the United States'' (1896)
*C Grandy, 'New Jersey Chartermongering 1875-1929' (1989
49(3) The Journal of Economic History 677
*K Kocaoglu, 'A Comparative Bibliography: Regulatory Competition on Corporate Law' (2008
Georgetown University Law Center Working Paper
*CM Yablon, 'The historical race competition for corporate charters and the rise and decline of New Jersey: 1880-1910' (2007
The Journal of Corporation Law
;Labour law
*S Deakin, 'Regulatory Competition after Laval' (2008
External links
Let A Thousand Nations Bloom
Charter Cities
The Seasteading Institute
Economic globalization
Competition (economics)
Public policy