Types of Regulation

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Those seeking to reform the regulation of higher education must understand the available tools.

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To understand the challenges with the current regulatory structure of higher education, as well as the challenges of reforming that structure, it helps to understand the potential and limitations of the different approaches to regulation more generally.

As my colleague Cary Coglianese has written, the government has many different regulatory tools in its belt, and it regulates different industries in different ways. Three main approaches to regulation are “command and control,” performance-based, and management-based. Each approach has strengths and weaknesses. Selecting the type of regulation to apply to a sector of the economy will have major impacts on the targeted institutions and on the potential for success in achieving regulatory goals.

Traditionally, the majority of regulations have taken the form of what is frequently referred to as command and control regulation (also sometimes called “means-based” or “technology-based”). Under this approach, the regulatory agency sets forth methods, materials, and the processes by which the regulated entity must operate. The now dissolved U.S. Atomic Energy Commission, for example, directed which technology must be used in approved nuclear power plants and regulated the processes by which companies produce nuclear power.

Command and control regulation, in theory, creates certainty—for the government, the regulated entity, and the public—that a body of experts have carefully developed the safest and most efficient mode of operation for the sector. This type of regulation is relatively easy for the regulator to observe and evaluate, and therefore to determine compliance. However, many have critiqued command and control as a highly expensive form of regulation, as one that increases the costs of products to the public, and as stifling of innovation. Critics also question whether regulators have the ability to develop the most efficient technological or procedural safeguards.

As critiques of government bureaucracy have increased in recent decades, support for an alternative to command and control has grown. With one such alternative, performance-based regulation, the regulator does not dictate the materials or processes the regulated entity must use to achieve societal goals, but rather sets ultimate production standards that the entity must meet. This approach allows the regulated entity the flexibility to determine the most efficient way to meet that standard. Take, for example, carbon monoxide emission regulations implemented under the Clean Air Act, which do not require the use of specific technologies or processes, but rather leave those choices to the regulated industries and instead mandate that emissions cannot exceed a set limit. In every administration since at least the Clinton Administration, performance-based regulation has been advocated quite explicitly within White House directives to regulators working in a variety of areas. It is an approach with bipartisan support.

Advocates of performance-based regulation argue that it promotes innovation and reduces costs by encouraging the regulated entity to figure out the best way to achieve societal goals. The evidence for such claims, however, is not nearly as powerful as the intuition that flexibility should lower costs.

Performance-based standards have their own limitations in practice, including fundamental disagreements over what the goals should be and how performance standards should be set. Sometimes critics of performance-based regulation question whether government can measure performance accurately.

Performance standards can have the perverse effect of privileging certain societal goals over others depending on the shape of the standards. If not monitored and enforced well, they also can lead to bad behavior by actors under pressure to produce results. The recent Volkswagen scandal, where the company rigged its emission systems to enable cars that violated federal emissions standards to pass the tests, is only the latest example of this problem. Examples even closer to home are the numerous cheating scandals in the nation’s elementary and secondary schools, brought on by pressure from federal performance standards.

In addition, when applied to heterogeneous institutions, uniform performance standards can still operate inefficiently by imposing a one-size-fits-all performance goal. It might not always be cost-effective to have every institution meet the same standard.

So, even though performance-based regulation continues to have strong advocates, policymakers rightfully question whether it is the answer in every case.

A third approach to regulation, called management-based regulation, has recently received increasing attention. Interest in it seems strongest in settings where a regulated sector is filled with highly heterogeneous institutions, and where the goals of regulation are diffuse and hard to measure. In these settings, mandating specific processes or setting hard and fast performance standards would not be appropriate. However, to protect society from damage or to produce societal benefits, the government requires the entity to “self-regulate.” The institution does this by engaging in a meaningful assessment and planning process that determines both the institution’s goals and the efforts they will undertake to achieve these goals.

Under management-based regulation, the entity sets the standards and evaluates itself (or through a third, non-governmental party) to determine whether it has achieved these goals. The benefits of management-based regulation are that it, theoretically, promotes innovation by enabling institutions to develop, and therefore buy into, their own standards. It is also cost effective, as the government does not have to take on the significant regulatory burden of developing the goals and measuring the sector’s success in achieving them.

One prominent example of the management-based approach arises in the area of food safety, where many countries have adopted the Hazards Analysis and Critical Control Points approach that requires food production companies to self-assess their potential safety hazards and identify preventive measures that they will adopt to deal with those risks. Another example is Massachusetts’ Uniform Toxic Use Reduction Act, which requires chemical companies to develop plans to reduce the amount of toxic substances they release into the environment. In both of these cases, the plans are reviewed and evaluated by a government regulator.

There are, of course, many potential challenges with this management-based approach. For example, it may be difficult for regulators or private evaluators to determine whether the goals and processes established by the institution will actually benefit society. Since the regulatory regime does not require any specific outcomes, but rather a process to determine outcomes, institutions could “game the system” and create meaningless plans that do not benefit the public. Furthermore, institutions could produce good plans but never implement them.

Good management-based regulation, analysts have argued, must be shaped by the regulator to ensure that the proper goals are being planned for and the plans developed can actually be implemented. Although it has limitations, the small amount of study on this relatively new approach to regulation has found that sectors imposing management-based regulation have seen increases in safety and productivity.

In recent decades, policymakers have debated frequently what type of regulation is most appropriate in a given sector of the economy. In many complex areas, such as higher education, the regulatory scheme involves a mixture of approaches. Command and control regulation still predominates, but efforts to adopt performance-based regulation continue to grow. At the same time, there is evidence that more regulatory agencies in the U.S. and abroad are considering management-based regulation to deal with the complexities of modern economic and social systems.

In order to assess how to improve regulation of higher education, it is essential to consider the strengths and weaknesses of the major policy options. Educational reformers need to take into account what we already know about the available regulatory tools.

Wendell Pritchett

Wendell Pritchett is the Presidential Professor of Law and Education at the University of Pennsylvania Law School. From 2014 to 2015, he served as Interim Dean.

This essay is part of a six-part series, entitled Improving Higher Education Regulation.