The Regulation Control Knob

1. TheRegulation Control Knob Marc J. Roberts Professor of Political Economy and Health Policy Harvard School of Public Health Africa Flagship Kigali, June 25, 2010

2. What is the Regulation Control Knob? • Regulation involves coercion—the use of penalties to get people to change their behavior: “Do it or else” • Regulation acts on one or more of three of the “six keys” – incentives on the organization, incentives on managers and incentives on workers • Those regulated generally don’t want to change, and often try to resist or undermine regulatory efforts

3. The Purposes of Regulation • Establish rules that allow private markets to function effectively • Protect consumers from their inability to judge products • Protect consumers from their inability to make good decisions • Counteract monopoly • Counteract “externalities”—immunization and pollution • Regulate to achieve non-market goals: access, equity, and compliance with social norms

4. Decide to Regulate Evaluate System Performance Secure Legal Authority Impose Penalties for Violators Write Rules Monitor Compliance The Regulatory Cycle

5. Regulation Involves Technical, Political and Administrative Difficulties • Those regulated oppose new regulatory initiatives • Writing rules requires mastery of complex technical details • Inspectors and judges can be corrupted or agencies “captured” by the regulated • Timely, accurate data may be difficult to collect • The agency may not have enough resources to cover all regulatory targets

6. The Inevitability of Administrative Discretion • Legislative language is often intentionally vague--intended to appeal to diverse constituencies • The world is very complicated-categories have “grey areas” • Rules cannot anticipate all situations or contingencies • Applying rules to specific cases often requires case-by-case judgment The effectiveness of regulatory efforts depends critically on how they are implemented

7. The Critical Role of Voluntary Compliance • Enforcement only deters when violators fear punishment • If violations are widespread, inspectors cannot catch/punish all violators • Then any one violator faces a low risk of being caught and punished • Only with significant voluntary compliance will violations be few enough, and the probability of being caught high enough, to deter potential violators

8. The Role of “Regulatory Legitimacy” • Voluntary compliance depends on those being regulated accepting the rules, on “regulatory legitimacy” • Inspectors and enforcers have to believe in the rules to act aggressively • Political leaders have to believe in the rules in order to provide resources and protect the regulators • Regulators and those regulated are influenced by popular acceptance of the regulatory effort

9. The Risks of Distortion and Deception • The data you want may be difficult to collect • The available data may not exactly measure the behavior you want • The regulated may distort their behavior to meet the “letter” but not the “spirit” of the rules • The regulated may report falsely—maintain inaccurate records, alter monitoring equipment, corrupt inspectors etc.

10. Self Reporting Issues • Deception matters most when those being regulated have to self-report— e.g. errors in hospitals • If penalties for small rules violations are large, they will not be reported honestly • Self reporting works best when those regulated maintain their own records that can be checked —(e.g. auditable financial accounts) • The higher the costs of collecting data for accurate self-reports, the less likely they will be made

11. Corruption as a “Rational” Response to Opportunities • Regulation creates many opportunities for corruption • Easier to acquire income/wealth via corruption than through honest work • Easier to develop political support and raise funds for campaigning via patronage and corruption than by providing good service

12. Corruption Can Reflect Social Norms • Preference for “us” (family, clan, tribe, etc.) in appointments/ purchasing reflects • group solidarity • the responsibility of the powerful • Such corruption provides a basic form of risk sharing and redistribution • Self-enrichment by leaders can raise the status and the self-respect of their followers “If you can’t help your own son, who can you help” Former Chicago Mayor Richard M. Daley

13. Weak Anti-Corruption Enforcement Makes Corruption More Attractive • Anti-corruption enforcement depends on resources, administrative leadership, political support • If corruption is seen as normal, inevitable and/or appropriate—these will not be forthcoming • Effective regulation requires anti-corruption efforts and strong governance at multiple stages in the process

14. Why Is Anyone Voluntarily Non-Corrupt? • Commitment to a cause : committed Communists, nationalists or revolutionaries • Commitment to religion: some missionaries, some Islamic fundamentalists • Organizational loyalty: to comrades, leaders, the mission • Personal identity: belief in a calling, craft or professional ethic • Concern for others: customers, clients, patients • Personal moral obligation

15. How Prevalent is Non-Corrupt Public Management? • Non-corrupt public management is a historically recent idea • There are large variations around the world • Between north and south Europe • Among state governments in the U.S. and India • Some corruption is more damaging than others • Are appointments sold to anyone, or can only the competent bid for jobs? • Are bribes collected from sellers of quality products or do they serve to steer business to poor suppliers?

16. Defenses of Corruption • We may use corruption to hold on to political power but we provide a superior set of policies and programs • We come from an historically disadvantaged group and are only defending our supporters’ legitimate interests • We are only following our own local traditions

17. Counteracting Corruption • Effective Enforcement • Mobilize public support • Provide adequately funds • Put in place effective, committed leadership • Establish administrative systems that make corruption more difficult • Make providing good service in managers’ interest • Provide performance-based incentives • Increase managerial capacity and motivation through training and selection Political support from the top is absolutely essential

18. The Special Problems of Regulating Clinical Practice • Doctors resent regulation and are socially and politically powerful • Correct behavior is difficult to define in many situations • Much clinical activity is not well documented • Patient characteristics affect outcomes To use regulation to change clinical behavior you have to involve/co-opt doctors in the process

19. Using Professional Bodies to RegulateTheir Members Advantages • Professional groups have expertise and legitimacy with members • Government avoids having to do a controversial task Disadvantages • Professional group may be too easy on their own members • Powerful members can capture the process

20. Certification/Accreditation As An Alternative To Regulation • If patients choose, and money follows the patient, certification can influence patient choice and provider incentives • Sometimes joined to contracting (e.g. hospital accreditation in Lebanon) • Since participation is voluntary, less protest from regulated • Hard to base certification on process – easiest to monitor inputs

21. Summary On Regulation • Successful regulation is not easy to do • Effective implementation depends on administrative capacity, data and legal systems, political support etc. • Proceed in ways that increase voluntary compliance and “regulatory legitimacy” • Beware distortion and deception • Be strategic--begin with the “low hanging fruit” : behavior which is generally seen as undesirable and is also easy to observe