The role of private decentralized institutions in sustaining industry self-regulation

An emerging body of institutional scholarship emphasizes the role played by private decentralized institutions in facilitating collective action among organizations. However, these institutions often suffer from free riding and opportunism. This may lead firms to exit the institution and eventually cause its collapse. In this paper, we explore how private decentralized institutions may be sustained despite these problems. We focus on one form of private decentralized institution – trade association-sponsored industry self-regulatory programs. We advance two alternative hypotheses to explain the sustained existence of industry self-regulatory institutions: (a) Firms participate to gain a participation-contingent benefit, and (b) firms participate to maintain a generally beneficial institution. Using a 10-year panel of data from the chemical industry, we find evidence consistent with the latter hypothesis for at least one prominent example of self-regulation. Our findings have implications for both specific models of industry self-regulation and general theories of collective action.