The case of the ‘partnership approach’ to public regulation

265

THE CASE OF THE ‘PARTNERSHIP REGULATION Benjamin Rqqrrs

GILAD

L’nrtvrsr~.v. USA

A rcccnt survey prohkms

by The

the regulatory

also bdicvc goals

reform

between rathsr

ncss that many regulators ;I partnership

approach

some:, involve from

recognition interest This

paper

regulation

attempts

than the obvious

tivc’ quoted above. The

with

of the exccutivcs

thcsc so&lily

desirable

attitude

1980:

3).

to

show

“get

that

the

the cncmy” regulation

to a grcatcr

approach

practice

exprcsscd

of

coulcl

is in the best

partnership

(adversary)

feeling of “annoyance” argument

busi-

“While

process may, in the opinion

rcasonablc

to the current

i.e.. the

toward

WC: believe much benefit

from

exccu-

the goals

and busincsscs.

the aclvcrsary

in terms,

in emphasis

is superior

to achieving

business

and share

the majority

govcrnmcnt

to the regulatory

that compliance

of :dI “(Grccnc

1980) on qulntory

most

adopt. As one cxccutivc commcntccl:

;I contrutliction ;I shift

than

that

regulation

I lowcvcr.

that the best approach approach.

Uoard (Grecnc suggested

govcrnmcnt

efforts.

is by cooperation

partnership

;lccruc

18. 19&J

Confcrcncc

and rcgulntory

accept the ncccl for

hchintl

other

TO PUBLIC

*

Received June 22. 1983. accepted January

tivcs

APPROACH*

for

to

reasons

by the cxccu-

ndvancscl in this paper is that current

practices

of

setting

and

externality

in the form

ability

executives

of

reduction lation’s

enforcing

regulation

of ~1psychological and

entrepreneurs.

in the “alertness”

of decision

immediate

area of impact.

make use of available

and useful

regulatory

practices

are sholvn

the source of control The

partnership

approach

effecting

let the private tory

of

by business

advisory

Yet another

some

form

beyond

behavioral

a

regu-

of executives

in their environment.

in a person’s

to

This

effects

of current

by a construct

regarding

environment.

assumes

to set the socially groups

councils

task

is to cnablc

rcsponsihility

of setting

several

forms.

desirable

The

goals and

of

forces.

husincsscs

and academics industry

and

interest

public

hcnring

of ombudsmen.

The

cbscnce of

and industry

and enforcing

is the manduspecial

these

groups

regulations

and

other

to share

the

(hcncc the “partncr-

approach).

Thcjugh putting

giving

the

cfflcicncy

husincsscs

fox

and

to guard

approach

similar

to

support

‘l’lic

first

:qumcnt some

;~iid

cmpirk~l

scctic)n rcl;itcs

hypothcscs

agcncicb. Tlii.\

borrow4

prc5cnts

about from

rc5ult

sccni5 in

hc bcttcr

argucmcnt

the

the :in;ilytic;ll

of sharing

eviclcncc

than

lihc of tllc

is baically of

xlv~rnt;~gcs

thcni.

terms

The

setting thcorcti-

psychology

provide

framework

on

an economic the argument

rchponsibilitics

frrjni

the framework

adcli-

the

field

will

of

to the partnership

argument and offers

bc basal,

psychology.

an approach

llic

including

‘The

approach

for its superiority.

which

second

to regulation

The

last 5cctic)n

to the: testing

of the

in the second section.

The

:ln;ily t ical framework

The

c~encc of regulation,

control

actually

ni;inag:cr5 clccidc how lo fill

insights

section

and provides

might

( 1’977)

rcgulatinn

the end

to that approach.

in favor

suniniaril.a

claim

own

hcnhou5c.

rcgul:itory

letting

cmpiric;ll

and

tional

of

Schult/.c’s

p;Ir;rmctcrs

;I say in their the

I’arcto-optiliiality

current

cal

the ability

The

is the establishment

of joint

suggestions ship”

expands

effect.

sector choose the means to achieve them. A more specific

discussed

creation

groups. or

making

psvchological

makers.

to regulation

general theme is for government suggestion

This

to be mediated

over events

an overlooked

effect on the decision

information

is an added social cost of regulation.

involve

bc it economic

over the choice of behavior(s)

or other\vise.

from

is the transfer

the rcgulatee

of

to the rcgula-

tor. The degree of that transfer depends on the restrictiveness of the regulation. However, any degree of regulation, of necessity. involves some loss of control of the regulatee over what ends to pursue and/or what means to employ in that pursuit. Unlike general laws which provide a framework for choice, regulation directs or dictates behavior in specific (regulator-determined) directions (Hayek 1960). While some economists might argue about the difference between laws and regulations. few will dispute the assertion that in imposing regulation. the intent of the regulator (be it a parent. a teacher. the Federal Trade Commission) is to control behavior. or more accurately, shift the control from the regulatee toward the regulator. One direct result is that the outcome(s) of the regulatee’s behavior(s) is (are) made dependent upon the decisions of the regulator. The effect of regulation, in other words. is to change the contingency rules in the regulatee’s environment by intervening in the causal relationship between the regulatee’s action illld its consequences, substituting it with the chain: regulatce’s behavior - regulator decision - consequences. Since the imposition of regulation, by its design, is aimed at changing the “power (or causal) structure” in one’s environment. it follows that any hcliof or perception held by the individual regarding the control in the cnvironmcnt should hc affcctcd. The most prominent hclicf of this kind which W;IS idcntificd ilnd cl~cu~llc~lkxi by psychologists is known as locus of control bclicf (hcrcaftcr. /AX’). Locus of control is &fined a.\

coliows:

The research on LOC hiis grown exponentially over the last dtxadc. Over 1000 studies have been performed to date, using several variants of the original measurement scale of LOC developed by Rotter (1966). The Rotter’s LOC scale is ;I 29-item. forced-choice questionnaire. where

each item way.

can be responded

The

scoring

responses The

of

behind

belief,

i.e.. that

locus

behaviors

of control in

psychologists tion

specific

of

the

that itttertd

is

that

the

on

The

is

LUC

a

is generalized

experiences.

based

orientation of

“external”

orientation.

The

to be extremely

environment.

individual

dent of much that is referred

scale

accumulated

the

con-

useful

in

source

of

importance

of the

or as a situation-specific individual.

differences

to differences

to suggest

the

sense of control

was found

repertoire

had in tracing

summing

situations

as a generalized

and performance

researches

use

in a particular

the cognitive

by

or “internal”

a more external

individuals’

however.

in

over events

belief.

the

an “external”

done

based on specific

of locus of control.

predicting

is

score reflects

assumption

across situations.

control

test

so that a higher

generdi:ed struct

the

to in either

in LOC

beliefs

locus of control

to as intelligent

and

the success

in learning,

perccp-

[2] has led

“may

behavior”

SOIW

be an antcce-

(Lefcourt

1976:

109) Given ogists

the importance intcrcstcd

hccanic

during

lift.

one’s

cnvironnicnts

The

of LOC thcorctical

‘l’hus tion

and thcrcforc it follows

The

of internality)

internal

happens that “‘l‘hc

to

bclicf 111~”

regulator

of the actual, mcnt. The affect

C;III

sxtcnt

the cxtcnt

a111

should

in control

is in control

of the 5hift

in

at earlier

in this on

cnvironmcnt.

one’s

Icad to c~tcrn~ili/.~ltiol1~li (or

individual (i.c..

of what

cxcrciscd from

rcgulatcd

has a direct impact

I

a111

(i.c., the

to change toward

change in the

of control

of

of f.OC’ and the c5scncc of rcgula-

of the affcctcd

bc cxpcctcd

objcctivc

the effect

which was hint4

of regulation

of “I

of

that psychol-

forces that shupc it

the

of causality

the definition

that the imposition

reduction

and

enc. since regulation

the attribution

from

it is not surprising

analysis

on the hclicf in control.

xcction. ih the most obvious control

hclicf,

in its antcccdcnts

locus

happens of

to nit”

control

toward

of kvhat

the cxtcrnal

by the regulator

internal

the rcgulatcc). source)

bclicf

in rcflcction

in the cnvircjnshould,

cxtcrnal

of courhc. pcrccption

A

logical

however,

necessity

hypothesis

is

individual

that

the

as a shift

the context theorizing beliefs.

in

a theoretical

as an observed

of

fact.

theory

framework

implicit

imposition

in control

LOC

An

of

from

is

not

assumption

in

regulation

him(her)self

to “powerful

about the effect of regulated

is

the

same.

the above

perceived

by

to the regulator

others”).

In other

environment

the

(or in

words.

in

on the individual’s

we assume the following:

LOC,=f(RLOC)

f'> 0

RLOC=

FL,,> 0 and

F(Rcq. IX,)

LOC, = z(Rq. &,)

(1) therefore.

(2) (3)

=;ccR 0

where Individual’s

LOC, RLOC

= =

RcaI

R c*,q

=

The

C.V,

=

other

(or

locus of control objective)

center

belief. of control

in the situation

(en-

vironment). dcgrcc of regulation

outconics Assumption the indivual continue which

cscapc the outside

that control.

over outconics

test of

thl:

validity

cvidcncc

(1) is prcscntcd

l‘hc

Second.

cuts regarding

of assumption the field.

Ivhilc

(1) will

might

(i.c.. in

actually

looks as if

to the individuaI

thcrcforc

evidcncc

First,

is not),

the situation

is cxtcrnal

The

over

control

hc/shc

the individual

superficially,

(c.g.. rewards)

from

[4]. A

have to rely

regarding

on

proposition

in the next section.

cffcct of rcgulatcd

individuals

not hold true for two reasons:

is in control

though

of control

(cnvir~~,nnlcnt).

the situational

hc/shc

is viokitcd;

control empirical

might

can niisintcrprcl cq. (1)

dctcrniinnnts

in ;I given situation

(1). howcvcr,

to hclicvc

cast

in the situation.

fanlilial/socinI/natural

environmsnts

has been examined

on the locus of control

by psychologists

in various

beliefs

settings

of and

among

diverse

families

populations.

Crrlndall

over a 10 year period.

behavior

and conducted

cence. “Coolness” be positively explained

correlated

not allowed objective causing

interviews with

rewarded

protective

contingencies

contact

with

[5]. The

them”

with variahlc

and

tcrmcd

wert:

to learn in

themselves

12).

of control

mothers”,

indcpcndcncc rcndcrs

comes from studies

arc

internality

was alone”

was prim-

(ranging

from

to our current

on prc)jccts dictated

Icarning. of open

of cclucational

;~llowctl

arc cxpcctcd to tahc initiative

traditional

later

children

to hc “left

discipline

it rclcvant

their

two other

while

and

werr

external

by these rcsearchcrs

csts. They

to

findings

the child

of parental

students

intlcpcndcntly

orientations

These

Mothers

less often

involvement

( 1976) a.4sc.~cd the cffcct of “open of studcnt~. Iii open classrooms,

cI;issrooms.

own

intense

who found

that allowed

3s related to

to the child.

independence.

less

(1976).

directing

identified

granted

lax

concern

cnvironmcntk

by I IorowiU

tr:iditic~n;il

(ion:

to

Crandall

them

be instrumental

to\vard

1973:

and Nowicki

set of findings

locus

posurc

adoles-

part were found

forced

Crandall

displayed

Lvhich clearly

rcgulatcd

Lvorking

and

by the strictncas

control),

Another

children

environments

mcaurcd

study

mothers

and

variables

(Crandall

“interfering

have

with

their

by Wichcrn

corrclatcd

the

“pushed dependency,

supported

to firm

early

that the fact that the offspring

was the degree of independence

internals

arily

of maternal

during

the outcomes.

internality

to

subjects

LOC of the youngsters.

internal

to rely on overly

cause-effect

LOC measureb in

studied

on the mother’s

by theorizing

One of the most significant of

with

and “criticality”

the results

(1973)

She made home observations

The

chilclrcn

who

had

with

the performance

OIIC

education.

which and

rcccivcd

reccivcd consistent,

OIIL’

which

early age in an open classroom

individual

intcr-

responsibility

for

and

LOC’

long-term

cx-

LOC orientation

long-term

had experienced and

freely,

consistent, and

to

about

the pcrformancc

education

groups:

as opposed

niovc

;LSSLII~C

A 011

cl;iaroonis”

by their

and

.4tudy coniparcd

to

settings.

“mixed”

later education

of

cxposurc

to

cduca-

in ;I traditional

setting. The more

results internal

showed than

that children

the other

scored closer to the ” traditional”

in the open cl;lssroom

groups. group

The

than

“mixed

to the

group

education”

wcrc group

open school group.

A

weakness

methods

in

to infer

on the other similar

Horowitz’s

study

hand. used a longitudinal

variables

on

an open campus ments on

LOC is enlightening:

schools were chosen: Campus

a comparable

with

a traditional.

of the students Open results

Closed

hctwccn

Plan

the two schools’

scnicstor

mcasurcnicnt,

students

ch:ingcd

Outside In a study

of elderly

people living orientation study

than

and

suggested

out,

and

survey in

students

setting,

cnvironmcnts Queen

a nursing by

during

of externality

(the beginning

of /.OC‘. The the

01

no diffcrcnce Open

of internality.

spring

Campus while

the

wcrc ncgligiblc.

on the formation ~incl

Frcitag

concerning

of /LX

(197X)

found niorc

bclicfs. that old internal

home. I3asccl on their

Mcndkoff

home patients

(1963).

the

authors

may have been more intcrn-

stay there. The

home but bccamc

authors

to the fact that nursing They

The

the institution

there arc scvcral studies

and

of the

scnicstcr.

was

that

group at a nursing

their

of students.

LOC orientation

spring

thcrc

the

and the other,

home had a significantly

Aldrich

more by others. when

were given

The

the

in the direction

His

was changed into

students

on the nicasurc indicated

were

of these two environ-

that bcforc

school,

one

students

people.

during

showed

the

comparabk

school

Rosen

environment.

at the onset of their move to the nursing

oriented

are control14 go

;I

a study

development

then

C‘anlp~~s

that the nursing

ally oriented externally

outside

effect

cnvironn~cnt.

howcvcr.

the cducalional

the cffcct of rcgulatcd

chosen.by school

in the fall scmcstcr

and

significantly

changes in the Closed

to assess the effect of

as collcgc students).

Campus

program)

Campus

on correlational

LOC. Rosen (1977).

and racial composition

socioeconomic

of the fall scmcstcr

the Open

the high

was nieasurcd

C’ampus

on

one where the environment

(basically

and responsibilities

with

high

0 a differential

hypothesizin,

same privilcgcs

reliance

approach

vs a typical

for

an Open

its

LOC. The two environments

program

rationale

Two

was

the effect of open environment

attributed

home patients’

are told when to cat. when they

they can Icavc the nursing

home. The

the lives can

active elderly

outside

homes 73-74).

the home “can come and go as they wish. and take care of their own needs” (Queen

In another families

were

study

by Bould

interviewed

(1977).

black

in a longitudinal

and study

maintain their o\vn and Freitag 197X:

white

female

of fatherless

heads

of

families.

Data for the study were collected in 1967 and in 1969 in order to determine the effect of su~~rc~s of income on the feelings of personal control of the female head of the family. The main difference between income from the public purse (in the form of means-tested income) and child support, as opposed to other sources of income, is. according to Bould. that the former t\vo interftw rr*ith the ulctonotr~g- of the ftrn~iJ~-. Both means-tested programs and child support payments allow their administrator the right “to pry into the private affairs of the family” (Bould 1977: 342). Following this argument. the author hypothesized that these women who must depend on such sources of inconx will be less likely to feel that they have some control over their lives and more likely to feel controlled by external forces. A stcpwise regression confirmed this hypothesis and analysis showed that “knowing the source of income significantly adds to the ability to predict scnsc of pcrsonai control “( Ik~lllJ 1977: 346 -347). In summary, the weight of psychological cvidcncc supports ccl. (3): An incrcasc in the dcgrcc of cxtcrnally impoxd regulation in a given situation will. c‘cVms pu7hu.v. induct ;I change in the locus of control of individuals toward a more cxtcrnal bclicf. It is this analytical framcwork that is now applied to a special class of rcgulatcd environments. the business cnvironmcnts, whcrc the mode of regulation is economic.

The business environment is dcfinud here as the set of conditions which faces the decision maker entrusted with making strategic decisions in a commercial firm. The emphasis on strategic decisions, as O~~OSCC~ 10 day-to-diiy operiltionill details is based OII tht: assumption that the: arca of decision making which is most affected by regulation involves decisions about new products, new plants, hiring/t~rminating, ilIld so on. (SW 13cr~nbcim 1981.)

The public regulation in the American business environment takes the following forms: (1) Direct price and wage controls. (2) Functional regulation. The second category. functional regulation. encompasses the working of the regulatory agencies and the state-specific regulatory activity. It is concerned with equal employment. financial disclosure. worker health and safety and environmental pollution. Direct across the board price and wage controls are rather rare in the U.S.A.. but specific industries. i.e., transit, public utilities are still regulated by variants of the price-control mechanism. The Conference Board Survey (Greene 1980) identified areas of regulation which were conlnlonly perceived by the 300 executives surveyed as having an adverse effect on the corporate decision making process. Among these areas. four bear direct relationship to the subject of control (and therefore locus of control beliefs): (1) Overlap and conflict; (2) Overextension: (3) Overregulating: (4) Delay. The first category, the overlap of jurisdictions among regulatory agencies and the conflicts bctwccn federal-state and state-to-state regulations. was cited as the most common problem by the executives. The relationship of this variable to the question of control and locus of control bclicfs is suggcstcd by the uutcomc of the ct>nfiicts. i.e., by the coyh.sirm.

confjdc~xif~v and iitrtwlrri~t~+~~ctcalcci

for

the c’xt’cu tivcs.

Since

the construct

of locus of control is based on the i~tc~~tific~~ti~~[lof cauxc-cffcct relation in the situation (SW the first section), t’xtt’rnal f,OC’ is caused by the perception of cvcnts ;Ls too complex to bc traccnhlc: to, or controll:tblc by WW’S actions. As one construction company

ex03tlivc:

of knowing tions,

not only

of obt3ining schcduks”

commr:ntcd:

:rnd complying in rcg:trd

rquircd (Grccnc

with

that

many

to cnvironmcntnl

certificates 1980:

“ You can well imagine

as putting

regulation”,

and, frequently,

;is causing

bztwecn

conflicting

situa-

but also it terms

in time

to meet project

;IIso percsivcd

them in a “whipsaw

the complexity

reguiatory

standards,

and permits

8). Executives

the conflict

different

the outcome federal

;tgt2icics

of

and state to harrass

the ~~~tnp~tny which

is caught in tht: power struggle. Overcxtcnsion, the second category, involves the perception by cxecutives that many regulatory agencies abuse their powers by overextending

their authority

Securities

and Exchange

are frequently Protection

ni~nti~n~d

Agency,

to are;ls :tnd details Commission

outside

and Federal

their Trade

mandate.

The

Commission

under this topic, as well as the Envir~~iin~~ntal

Occupation

Safety

and f-ieaith Administration

(Dc-

purtment

of

Labor).

update standards. account tion

and

of economic

are but

executives* dictate

was

rules

The

relationship

mediated

by

the

decisions.

Internal

cause-effect trary

issue

relations.

in the situation. case with The with

arbitrary

FDA how

to run

the

perceived

essence

attempt

judicial of

the

overextentlon

control

of systematic of arbistructure

this

is not

the

is frequently

1980:

obvious. the

cited in connection

company

put it: “(T)hc

that they try to tell a manufacturer

(Greene

others”

is

their planning

and regulations.

of a chemical

go into such detail is quite

beliefs

of authority.

overregulation.

his business”

and

regulatory

on the perception

are able to adjust

rules

the

legislative

i.e., the lack of a clear causality

specified

of

to write and

to locus of control

attitude

to

to take

to relax regula-

The

arhirrurin~s

most companies

to control

“ powerful

agencies

As one executive

regulations

category

many disregard

and external

category.

the FDA.

overextension.

Failure

procedure.

belief depends on the perception

to clearly

third

Administration. standards

of this category

of actions.

While

and activities

that

of

LOC

consequences

of

and

processes.

Drug

or to abide by a mandate

examples

complaints own

and

the “feasible”

impact

a few

their

Food

to follow

43). The

relation.\hip

of this

kvith the rise of ;I perception

decisions

rather

than

the

that

executive

him( hcr)sclf. ‘I‘hc category l’xccutivcs

cited

of delay tlclays

that

planning

obvious

incrcahc in uncertainty relate to the

toward

of projects, addition

In

bctwccn

to

disthe

hctwccn action and

to the adoption linh

hclisfs.

niarhcts.

of clccision3, a &lay

causal

external

the viability

a losb of

caused

is clearly counterprocluctivc

these bclicfs

as

a shift

thrcatcned

ruptcd outcomc

and

may induct

of internal

OIIC’S

behavior

bclicfs,

and its

coIlxqlIcIlcc.\.

most

‘I’hc

plaints than

important

the policies

perceptions industry

what

firm

obvious

feature

opinion

aspect of the above com-

is that “the

what

it IHMS~ do”

it could

One of the mo5t persistent old generation t101 do. The

(see Perkins

1979).

object to the fact that regulation

/ION’ to achieve

the procedure

troubling

in recent years is pcrccivcd as different

in the early 70’s.

makers

tell business

many executives the

activity

pursued

of decision

agencies would tells

and most

is that regulatory

of direct

desirable

price control,

used in functional

by business

goals.

pcoplc

if

Stated

attempts is,

but it srcms

regulation

is that

This

of regulatory

new generation

of

differently. IO dictate

course.

to have permeated

as well. A widely

regulations

to

a moht

were

expressed

to “establish

goals. and then work with the private sector on the various alternatives for reaching them, many of the current complaints about regulation would disappear” (Greene 1980: 2). This point drives to the heart the issue of control. The setting of goals (or framework for decisions) is. by itself. not necessarily detrimental to one’s feeling of internal control over a situation. The use of directives to dictate the means to achieve a goal is the most powerful method of transferring control from the regulatee to the regulator and should have a considerable effect on the belief of control. This was clearly demonstrated by the psychological studies cited previously. The alternative suggested by executives, therefore. is not merely a self-serving approach. but carries implication to the ability of decision makers to perceive their behavioral effectiveness in shaping the course of events. This alternative which is termed here the “partnership” approach to regulation enables the individual decision maker to retain a sense of personal control over the major areas of managerial activity. This shtrrir~,~ of rc?.~potlsihrlit~. in addition to the utwious benefits of providing expertise to the regulatory process, may serve to avert the conscquencc of shifting responsibility from the decision maker to the regulator. which stems to bc the fundamental elcmcnt in the dcvclopnicnt of an cxtcrnal locus of control hclicf in individuals.

To keep the discussion in the framework of cost-bcncfit analysis, one must show that externalizing the JcciGon makers in ;I regulated cnvironmcnt (industry) involves additional costs to society, beyond the traditional costs ilSSociilted with regulations. Briefly, these additional costs are the results of a different cognitive behavior of external vs internal individuals. Internal individuals were found to be more cognitively alert, adaptive, and capable of bcttcr extraction and USC of information in the environment than more external individuals. The area of research from which these findings come is known as the cognitive correlates of LOC. In one classic experiment, Pharcs (1962) administered electric shock to subjects in two different situations. The first situation (labeled the skill situation) allowed the subject to Iearn ~111 appropriate (and fixed) response that could terminate the shock. The second situation (labeled the chance situation) made the appropriate rcbponsc contingent on an arbitrary decision of the experimenter. In

both cases. the learning nonsense

syllables,

thresholds threshold

for

the

the subjects To

The

economic

group

what

people perceive outcomes

their

control.

When they

terms.

of “skill-chance” that in which for whether of learning whether

behave

situations

between

I’harcs

sxpcrimcnt

ings

studies ability

to Icarn internals

much

useful

quicker superior

sensitive.

with

for

are perceived pay”

(Rotter

Icarning

noticing

in

their

and so forth.

internal

alert.

1966:

such as response

3).

for

regarding

opportunities

externals.

to bc for

new and profitable and

and Ducclfe

locus of control

by

find-

achieving

were found

and utilizers than

The

a char~ictcristic~illy

opportunities

to assimilate

Walk

relations)

suggc~tcd

supports.

for

kind

dctcrmines

[7]. lntcrnals

the potential

In

studies

situation the right

(or cause-effect

additional

about

ability

as outside

stay

and pcrccption)

and externals

in

to

believes his behavior

nunicrous

in the environment”

the individual

they

determines

in control

(pcrccivc)

when

. . . will produce a different

occur”

as “ more active perceivcrs

information tually

will

that

this and several other

lo cues in the cnvironmcnt

information,

internals

is given

is

skills,

the arca sh~>wcd. cc~naistcntly.

bctwccn

gain,

of

alert for opportunities

doesn’t

from

arbitrarily

(mainly

rcwar&

altcntivc

showed

[h] was that “a learning

received

in

measured

to depend on their

“it

the belief

tliffcrcnt

behaviors.

as if

the conclusion

behavior

group,

to

in the

labeled this behavior

these same outcomes

or not [a reward]

more

Phares

experiment

than one where the subject

and cognitive of

the

the experimenter

relation

by the subjects greater drop

the “chance”

trial.

in a situation

or not a [reward]

The

than

pays” to become perceptually

self-enhancement. psychological

required

to recognize

the perceptual

vigilance”.

jargon.

behave as if “it

were

was a significantly

to a post-schock

“perceptual

an ability

variables

i.e., the time

result

“skill”

a pre-shock

involved

the dependent

of these syllables,

perceive the syllables. from

of the response

and

USC

(1974)

pcr~onally ch;iractcriLc

of actual or potential l’hares

( 1976)

Iabcls

belief as alert and pcrccp-

The evidence in “favor” of internal locus of control is. by now. overwhelming. at least with regard to superior cognitive behavior. The implications to economics are therefore offered with relatively sound experimental basis. The ability of decision makers in the firm (be it the entrepreneur or the chief executive officer) to notice, perceive. or learn about new and profitable opportunities in the environment is the force that drives the market closer to equilibrium (Kirzner 1973). or, if one adopts a Schumpeterian view of the market economy. the force of change and growth in the economy. The characteristics of optimal market environments are therefore related to the extent to which they encourage the discoveries of profitable opportunities (see also Nelson and Winter 1952: 268). The superiority of internals over externals in this particular area of “cognitive alertness ” means that internal decision makers in any industry are preferable. from a social cost-benefit point of view. to external decision makers. This is true whether one is concerned with improving productivity, expanding markets. adopting new technologies, or just discovering more efficient uses of resources. The difference bctkvcen an external and internal decision maker can he described. somewhat pOCtiCillly, il$ the diffcrcncc hctwcen a hlindfoldcd hunter and an open-cycd one (S]. The implication regarding public rcguiation, i.e., that opporlunitics for improvcmunts arc missed bccausc decision makers hccomc less cognitively alert. is clearly iI11adtlctl social cost rcgardlcss of the theory of firm’s hchavior cmployctl. Thus, if one works within a ncociassical (maximi/.ing) theory, the reduction in the ability of decision makers to consiclcr alternatives constitutes sub-optimal behavior. If one adopls the evolutionary theory. the same reduction in cognitive inputs would impact on the ability of firms lo “search” for 1lowever. one should also note that a counter superior tcchnologics. argument, in line with Nelson and Winter’s model ( 1982). might suggest that the competitive process will ensure that the ttlnst internal decision makers win the competitive battIc, and that the added regulatory constraints would onlc serve to reward higher internatility. If such a possibility is true, one would expect executives in rcgulatcd industries to exhibit hi,q/wr internality than their counterparts in less regulatccl industries. A test of these two hypothcbcs is suggested in the next scclion.

278

Summary

B. Gtlud / ‘Purtnrrrhrp

and future

upprouch’ to puhlrc rr~ulutron

research

This paper argues for the advantage of a partnership approach to regulation over the current practice which largely excludes the private sector from having an effective input in the setting and enforcing of regulation. The analysis provides a theoretical as well as some empirical evidence about the effect of current regulatory practices on the cognitive behavior of decision makers in the private sector. By treating the effect of regulation on a particular belief about the locus of control in a given environment as an externality of the policy, this paper suggests that the cost of regulation may be greater than is usually recognized due to. presumably, an unintended consequence of dulling the awareness of decision makers to profitable opportunities in the environment. The argument advanced here should not be interpreted to imply that regulation per se is undesirable but that the procedure or practice of setting and enforcing it should be improved in line with previous arguments such as Shultze’s ( 1977) [9]. The theoretical and empirical analysis prcscntcd in this paper relies hcnvily on psychology and as such a qualifying note might hc desirable at this point. Psychology. as a rule. does not provide gcncral laws bctwecn phenomena. but rather empirical relations which are contingent, by nnturc. on the situational however, should not be that illld personal paramctcrs. The conclusion. the “psychology of regulation” is unimportant and can be .w/L!L* ignored. Rather it is an cxtcrnality of unknolvn magnitude, that has been widely ovcrlookcd. In the words of David Alhadcff. regard the that niuch niorc tcntalive nature of Lhe hypothcscs as “[al rcmindcr laboratory inlCrilctiOn

probably possible offered

work Of

be required to further the mutually reinforcing (Alhadeff 1982: 5). This is pSyChOlOgy illl~l economics”

a much research below.

will

more designs

fruitful to

approach test

the

than

the alternative.

thypothcsis

of

this

Several paper

arc

A direct test of the hypothesis that current regulatory practices reduce the ability of decision makers to notice profitable opportunities via their effect on the locus of control of the rcgulatces would have to overcome the problem of quantifying innovative (in the narrow,

Schumperterian sense) activity. as proxy for opportunities discovered and exploited. while controlling for intra-industry differences. One possible modelling is to employ output per worker as the dependent variable, controlling sales. capital/labor ratio. an index of scientific knowledge “ base”. R&D expenditure. etc.. and including a measure (average) of top decision makers’ locus of control, for a sample of firms from regulated vs non-regulated industries. The problems with such a model is that too little is known about the actual determinants of innovative (or inventive) behavior and therefore such a study might have to wait for a better understanding of growth patterns in different industries.

An indirect test of the hypothesis which would also directly address the alternative hypothesis is a cross sectional assessment of locus of control of decision makers in various industries, where one of the independent variables is the degree of regulation in the decision maker’s environment. Ideally. a longitudinal study of lociis of control attitudes of decision makers in industries experiencing a transition from one regulatory regime to anotlwr is ncedcd to provide a clear causal cvidcncc of the cffcct of public regulation on decision makers in the private

sector.

control

over a multitude cniploy

could

by Roltcr’s

1Iowevcr a model

scale)

(or durnniy)

industry.

The

to the effccl notice

rcsulls

will

test

of

for

of cxccutivcs

Dcrcnbeim

others

(1981).

The in

fact

the

of

various

in the parlicular

smnc

on decision

provicic cvidcncc

and the ability

A mm

elaborate

regulalory

is

to

study

practices

under

agencies

climcnsions

be interesting

effects

(as nicasurcci variahlcs and on

indirectly behavior

for rcgulatccs

that

rclcvanl

oiic

bciicfs

aclivity

industries.

cffcct

rcquirc

on the cffcct of public regulation

and thcreforc,

attilucics

It should

have more externalizing

Rcfcrcnces

regulatory

in the rclcvant

agcncics.

than

for

and

Altcrnativcly.

and cicniographic

on the cognitive

a difforcntial

arc costly

variahlcs.

locus of control

shed light

locus of control

different

” worse”

variabic

of regulation

stutiics

tinic-rclatcd

rcgrcssing

should

opportunities

mcnsuring

of

on sociocconornic

an in&x

on the atlitudcs

longitudinal

by

the authority

arc

considersd

documented

by

to SW if thcst: agencies also makers under

their control.