Industry Self-Regulation, Subversion of Justice, and Social Control of Torts

We characterize the comparative efficiency of industry self-regulation as means of social control of torts. Industry self-regulation is, unlike liability, which is imposed by courts ex post, similar to government regulation in that self-regulation acts before the harm is done. However, the industry, as compared to government regulators, possesses better information about the regulatory issue at stake. Furthermore, a pro-industry bias inherent to self-regulation will also arise under alternative legal arrangements when adjudicators are vulnerable to pressure by industry members. We show how social desirability of delegating regulatory authority to the industry varies with ease of subversion of courts and regulators, tightness of extralegal constraints under self-regulation, status quo legal regime, and industry hazardness. Our findings clarify when industry self-regulation could be an attractive institutional arrangement for developing and transition countries