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Government & Markets
Cross-Ideological Coordination by Private Interests: Evidence from Mortgage Market Regulation Under Dodd-Frank
How do special interest groups seeking to influence government regulations interact with one another? In this working paper, Sanford C. Gordon and Howard Rosenthal examine how the politics of rulemaking around financial markets informed the 2010 Dodd-Frank Act. While Dodd-Frank required banks to take a financial stake in the securities they created as a way of discouraging excessive risk-taking, some types of assets—such as “qualified residential mortgages”—were exempted from the requirement. Through an analysis of regulatory debates, Gordon and Rosenthal find that early versions of the law would have only exempted certain qualified mortgages, yet the final law eliminated the financial stake requirement for these types of mortgages altogether. They argue that the proposed regulation was weakened not simply as a result of maneuvering by large banks, but rather through the collective effort of a diverse coalition of homebuilders, mortgage brokers and insurers, and advocates for minority homeowners. Using text analysis tools, the authors find that the timing and content of these interest groups’ comments were coordinated, and hypothesize that this coalition formed out of a bargain between well-financed industry groups that funded lobbying campaigns and non-profit organizations that contributed ideological diversity to the effort. This hypothesis suggests the need for greater nuance in considering how interest groups come to influence regulatory outcomes.
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The Politics of Rulemaking in the United States
Who sets the rules that govern rulemaking? In this review article, Susan Webb Yackee offers a survey of the regulatory process, describing the formal mechanisms for promulgating federal regulations and identifying the different actors who hold sway over the process. In particular, she highlights how each of the three branches of government can influence regulation: the White House can use the Office of Information and Regulatory Affairs (OIRA) to order cost-benefit analyses of proposed rules and modify or veto agencies’ recommendations; Congress can mandate federal rulemaking or strike down regulations through the Congressional Review Act; and courts can impose legal tests on agencies that must be satisfied to justify rulemaking. Yackee likewise explores the more informal ways that different actors can influence rulemaking, focusing specifically on public input during the “notice-and-comment” period following the proposal of a regulation and the capture of regulatory agencies by private interests. She concludes by calling for increased scholarly attention to the rulemaking process from political scientists and suggests that future research on rulemaking might productively focus on agency guidance documents. Such documents are not legally binding regulations but may nonetheless significantly influence economic actors’ behavior.
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Corruption as a Self-Reinforcing “Trap”: Implications for Reform Strategy
What is the most effective way to fight corruption? In his paper, Matthew C. Stephenson seeks to examine the idea that the presence of corruption necessarily breeds further corruption and that the only way to curb it is through drastic, rapid reforms. While exploring the various reasons corruption often perpetuates itself, Stephenson uses a formal model to argue that such self-reinforcing tendencies do not mean that incremental reforms are incapable of curbing corruption. In fact, he suggests that corruption’s self-reinforcing nature may make incremental reforms more effective than “big bang” solutions, since the latter may serve to perpetuate corruption by concentrating power in the hands of a small number of authoritarian leaders. Stephenson, while acknowledging the potential downsides of more gradual solutions, concludes by urging advocates of good government not to rule out any possible antidotes to corruption.
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