Regulatory Entrepreneurship

In our new article, available here, we examine what we term “regulatory entrepreneurship”: companies pursuing a line of business in which changing the law is a significant part of the business plan.  Regulatory entrepreneurship is not a new phenomenon, but it has become increasingly salient in recent years, as a host of high-profile companies – from startups such as Airbnb, DraftKings, and Uber to public companies such as Tesla and Alphabet (formerly Google) – have adopted this strategy. These companies, and other regulatory entrepreneurs, have spent enormous amounts of resources pursuing lines of business that reside in legal gray areas, or are even legally prohibited, with the hope of changing the laws to their benefit.  For these companies, political activity is a critical part of their business strategy.  We study how these companies work to change laws, theorize when regulatory entrepreneurship is most likely to be a viable business strategy, and analyze the long-term consequences of regulatory entrepreneurship.

In their quest to change the law, regulatory entrepreneurs have sometimes used conventional lobbying methods.  However, they have become better known for more creative techniques:  They break the law and take advantage of legal gray areas, asking forgiveness instead of permission.  They seek to grow “too big to ban” before regulators can act.  And, perhaps most striking, they mobilize their users and stakeholders as a political force and use them as leverage to win the change they want from politicians and regulators.

Examining how regulatory entrepreneurs push for legal change gives insight into the circumstances in which regulatory entrepreneurship is most likely to succeed.  First, we observe that some kinds of businesses lend themselves to regulatory entrepreneurship more easily than others.  The larger the potential profits from changing or shaping a particular law, the greater the incentive for a company to enter the business with that goal and the more resources that it will be willing and able to commit to the effort.  Businesses that can grow quickly, that enable interaction, and that appeal to an economically diverse audience are well suited for a regulatory entrepreneurship model, because they can rapidly accumulate a large body of stakeholders and then mobilize them politically.  Platform companies such as Airbnb, Uber, DraftKings, and FanDuel tend to have all of these characteristics, making them well-suited for regulatory entrepreneurship.

Second, the likelihood of successfully executing a regulatory entrepreneurship strategy depends on a number of factors related to the law in question.  One important factor is the penalty that the law imposes on violators. Large or criminal penalties may deter regulatory entrepreneurs, whereas pushing the boundaries of the law may be an attractive prospect when only small civil penalties are at stake.  The level of public support may also play a role:  Unpopular laws may be easier to change than popular ones.  In addition, another factor is whether the law in question is determined at the local, state, or national level.  Change can often come about more quickly at the state and local level than at the national level, and companies have more flexibility as they push for change. For example, they can target jurisdictions with more sympathetic officials, or time their battles when their opponents are weaker.  Further, companies can often afford to lose in at least one state or city without jeopardizing the entire venture.  Finally, because regulatory entrepreneurship is a form of politicking, it is better suited to the more political branches of government, where companies can leverage their users and stakeholders to their advantage, than the courts.

Third, startups are generally better suited to a regulatory entrepreneurship strategy than more established firms.  By their nature, regulatory entrepreneurs are innovators, and much of the growth in private R&D in the U.S. economy is attributable to relatively small and new companies.  Culturally, startups often pride themselves on being disruptive and changing the world.  Startups and their investors may be more inclined to take on the uncertainty of changing or shaping the law, and have less to lose economically, than more established companies.  Nonetheless, we readily acknowledge that established companies are capable of engaging in regulatory entrepreneurship as well. Examples include Alphabet’s foray into self-driving cars and Tesla’s strategy of trying to change state laws that require car manufacturers to sell through independent dealerships.

Understanding regulatory entrepreneurship is important because it is likely to increase in coming years and shape existing and future laws.  The market has become comfortable with regulatory entrepreneurship as a business strategy, and as information technology continues to advance, companies will likely continue to gather user data, make people more connected, and make it easier for citizens to express their preferences to policymakers.  This creates new opportunities for companies to mobilize large groups of people on their behalf and to act as agents for legal change.

One intriguing aspect of regulatory entrepreneurship is its potential to lead to different coalitions being formed, and therefore different laws being enacted, than has been the case historically.  Whereas politicians usually work with pre-existing, organized interest groups, regulatory entrepreneurs have mobilized previously unorganized people.  For example, “People for Deregulated Taxicabs,” “People for Short-Term Rentals,” and “Citizens Against Car Dealerships” were not pre-existing groups; Uber, Airbnb, and Tesla organized people who were sympathetic to their positions and rallied them to take action.  And whereas politicians are typically motivated by some combination of values, ideology, and a a desire to advance their political careers, regulatory entrepreneurs are primarily motivated by the desire to earn profits.  Differences between politicians and companies may also play out in terms of how policies spread across jurisdictions.  Because of the structure of the U.S. political system, politicians usually have bases of support centered in particular geographic areas.  By contrast, businesses are focused on growing their customer bases in a way that politicians generally are not, which may facilitate widespread change at the state and local levels.

A potential benefit of regulatory entrepreneurship is its ability to combat laws and regulations that provide concentrated benefits to particular interest groups, while imposing diffuse costs on the public.  Regulatory entrepreneurs can be a force against laws with asymmetric costs and benefits, such as occupational licensing and restrictive zoning regulations.  This is because the companies can both lower the cost of civic engagement for their users– the public – and create a dynamic in which a new actor (the company) is willing to actively push for change.  For example, taxicab regulations that limit the number of taxicabs in an area raise profits for the taxicab industry but impose diffuse costs on many consumers, none of whom has much incentive to lobby for change.  Uber, because it profits by taking a cut of every ride booked through its app, has strong incentives to push back against such regulations.  Uber also makes it easy for its users to voice their opposition to these regulations; users can simply push a button on their phones to sign a petition challenging them.

Yet regulatory entrepreneurship is not an unmitigated good.  Companies engage in it for profit and will generally use their political power to pursue their own interests, which may not coincide with those of society.  In some instances, regulatory entrepreneurship may create significant social costs.  Overall, whether one considers it a positive or negative development may vary by context, taking into account a full range of social and economic implications.

This post comes to us from Professor Elizabeth Pollman at Loyola Law School, Los Angeles, and Jordan M. Barry, Professor and Herzog Endowed Scholar at the University of San Diego School of Law.  It is based on their recent article, “Regulatory Entrepreneurship,” forthcoming in the Southern California Law Review, available here.