Gaming Regulatory Processes

There is an interesting new paper by Yehonatan Givati called "Game Theory and the Structure of Administrative Law", interesting principally because of its focus on advance ruling and licensing rather than the well-known distinction between adjudication and rulemaking. Here is the abstract:

How should administrative agencies choose among the different policymaking instruments at their disposal? Although the administrative law literature has explored this question with respect to the instruments of adjudication and rulemaking, it has failed to appreciate two other powerful instruments at agencies’ disposal: advance ruling and licensing. Taking these four policymaking instruments into consideration, this Article provides a general theory to guide agencies in selecting the most suitable policymaking instrument in different policy environments. To do so, the Article utilizes a new game-theoretic framework, focusing on two central dimensions of policymaking instruments in particular: timing and breadth. This framework provides two valuable implications. First, it highlights two key administrative challenges that are underappreciated by the academic literature: the hold-up and leniency problems. And second, the framework shows that administrative agencies are underutilizing two powerful policy making instruments, namely, licensing and advanced rulings. I argue that these two instruments area valuable across areas of law.

Here is an extract:

Specifically, when firms are relatively homogenous, so the agency knows that most firms’ reaction to a chosen policy will be desirable, or that most firms’ reaction will be undesirable, agencies should choose rulemaking as a policymaking instrument. When firms are relatively heterogeneous, so the agency’s only guess is that firms will be more or less evenly split between those with desirable reaction to the policy and those with an undesirable one, agencies should choose either licensing or adjudication supplemented with advance ruling. In this region, the more firms have an undesirable reaction to the policy, the more likely it is for adjudication supplemented with advance ruling to be superior to licensing...

There is some resemblance to Braithwaite and Ayres' classic Responsive Regulation, though Givati's paper is focused more on what happens at the policymaking rather than enforcement stage.The paper can be downloaded here.

Along similar lines is a keynote speech given by regulatory lawyer Rodney V. Northey during the Canadian Energy Summit: "Regulatory Chess: How energy proponents should approach regulatory approvals". Northey likens the search for regulatory approval to a game of chess (and draws illuminating contrasts with dominos and checkers):

In my experience, the game of chess offers an apt image for regulatory strategy. Right off the bat, there are two things about chess that appear well-suited to guide regulatory strategy:

• Chess reflects the idea that regulatory approvals are not mechanical, straight-line processes. In chess, it is very rare that one side can end the game in a few quick steps.
• Chess also reflects the idea that regulatory processes involve multiple pieces, doing different things, toward an overall objective.

Indeed, even the image of chess may not quite capture the complexities of regulatory processes which involve multiple players. Sometimes an applicant might find itself playing multiple games of chess simultaneously, facing and responding to different strategies from different players. This is something that requires a lot of smarts.

One of the notable aspects of the Supreme Court of Canada's recent decision in Katz Group Canada Inc. v. Ontario (Health and Long-Term Care), 2013 SCC 64 is how alive the Court was to the dynamism of the process of regulating drug prices:

[41]                          It bears repeating that Ontario’s totemic struggle to control generic drug prices has been an incremental one, due in part to an evolving awareness of the mechanisms that can lead to high drug prices, and in part to the dynamic nature of the problem: each time the government has introduced new measures, market participants have changed their business practices to obviate the restrictions and keep prices high.

[42]                          The private label Regulations are part of this incremental regulatory process, tailored to address a proposed business model in which the private label manufacturer is a substitute for a manufacturer which already has its drugs on the market in Ontario.

I think the result here was the correct one. Courts responding to regulatory measures in dynamic environments should be deferential. Regulation under uncertainty is a complex business and one which should be left primarily to regulators.