Structuring Regulators

The Effects of Organizational Design on Regulatory Behavior and Performance
June 2, 2015

Christopher Carrigan
Lindsey Poole

Download this Research Paper (Penn Program on Regulation)

Executive Summary

Regulatory organizations can be structured in different ways, and choices about their organizational structure can impact regulators’ behavior and performance, both overall as well as at the level of individual employees. This paper analyzes structural decisions about regulatory organizations along two dimensions:

  1. Vertical structure. Structures that affect the relationships between regulatory organizations and their political overseers are vertical structures. These structures can be designed so that regulators operate more or less “independently” of elected overseers. For example, some organizations have little structural independence because they are headed by officials who are themselves elected officials or political appointees of such officials. By contrast, other regulatory organizations can be headed by longer-term civil servants or by appointees who serve for fixed terms and cannot be easily removed from office.
  2. Horizontal structure. Structures affecting the breadth of regulatory organizations’ tasks may also impact their effectiveness. For example, legislators can assign just one main regulatory task or program to a regulatory organization, or it can assign a diverse set of tasks or programs to the same organization. Sometimes regulatory organizations will also be assigned tasks or programs that do not involve regulation, such as collecting taxes. These horizontal structures might alter how the organization behaves and how well it performs.

A review of an expansive body of research on both dimensions of regulatory structure leads to two major conclusions.

The first conclusion is that organizational characteristics typically thought to be unrelated to structure, such as employees’ mobility and diversity, as well as the political environment in which the regulator resides, have important consequences for the relationship between organizational structure and organizational behavior.

  • Formal mechanisms of vertical structure that are often used to foster regulatory independence include limiting politicians to removing the regulator’s leaders only for “good cause” and decoupling elected officials from political sources of budgetary support. Still, contextual factors including the presence of other veto players in the political environment as well as the mobility of regulatory employees can be potentially as important, if not more important, drivers in affecting whether regulators operate independently in practice.
  • With respect to horizontal structures, a regulatory organization can be assigned by its political overseers other missions that require it to consider public goals that may even conflict with its regulatory charge. Still, these structures are not entirely determinative of regulatory performance. Agency features such as the physical proximity of its various divisions, the diversity of employees’ professional backgrounds, and the degree to which organizational processes and systems are integrated can serve to reinforce or undermine initial horizontal structural decisions.

The second conclusion which emerges from our study is that all organizational design choices involve tradeoffs. Decisions about how to structure regulatory organizations should take these tradeoffs explicitly into account.

  • Structuring a regulator vertically to be independent confers a number of benefits, including providing a stable environment for the regulated industry and more durable policy decisions, all while encouraging regulatory personnel to develop deeper expertise. At the same time, independence can come at a cost, including raising concerns about public accountability, transparency in decision-making, and the potential for regulatory capture, a situation in which the regulator serves the benefit of the regulated industry instead of the public interest. Similarly, structural decisions about whether regulators should be headed with political appointees or career civil servants reflect a tradeoff between democratic accountability and technocratic expertise.
  • Similarly, regulators that are horizontally structured so as to have both regulatory and non-regulatory missions or, alternatively, that implement a diverse set of regulatory programs can experience goal ambiguity, which can increase management challenges and reduce employee motivation and effort. Yet, at the same time, combining missions can enable the regulator to realize synergies in sharing information and reduce inefficient duplication within its larger administrative apparatus.

The reality is that while structure matters, a regulator’s performance is not fully determined by its structure, whether vertical or horizontal. Management still matters.

The recognition of the importance of nonstructural aspects of regulatory organizations is important because a regulator’s structural design is typically not something in the control of the regulator itself. Rather, it is often determined through a complicated political process involving a multitude of stakeholders with divergent agendas that may care little about how a policy is actually implemented. Even so, despite seldom having control over their organizations’ formal structures, regulatory leaders can still use their management of the nonstructural aspects of their organizations to foster performance success. The starting point for achieving success is to be attentive to and understand the sometimes hidden promises and pitfalls that exist in both the vertical and horizontal structures of their organizations.