Berkeley Program in Law and Economics

Self-regulation is often seen as a means to make use of information unavailable to governments or rule setting agencies. Critics fear that self regulating industries do not only use their superior information to achieve a given level of environmental or consumer protection, but also use their self-regulatory power to reduce this level of protection. This paper studies self-regulation as a two-stage rent seeking process: at the first stage, the industry to be regulated and a group whose interests are protected by the regulation invest in lobbying for or against self-regulation and to achieve favorable conditions of the self regulatory process. At the second stage, the same parties lobby to achieve favorable governmental or, respectively, self-organized regulation. The paper shows under what conditions the interest group protected by the regulation gains from self-regulation, given that protection of their interests becomes cheaper by self-regulation, but their influence in the second, decisive stage is weaker under self-regulation than under government regulation.