Drift and Adjustment in Organizational Rule Compliance: Explaining the “Regulatory Pendulum” in Financial Markets

Ignacio J. Martinez-Moyano (), David P. McCaffrey () and Rogelio Oliva ()
Additional contact information
Ignacio J. Martinez-Moyano: Decision and Information Sciences Division, Argonne National Laboratory, Argonne, Illinois 60439; and Computation Institute, University of Chicago, Chicago, Illinois 60637
David P. McCaffrey: University at Albany, State University of New York, Albany, New York 12222
Rogelio Oliva: Mays Business School, Texas A&M University, College Station, Texas 77843

Organization Science, 2014, vol. 25, issue 2, 321-338

Abstract: This article integrates research on rule development, compliance, and organizational change to model rule development and compliance in organizations, using causal-loop modeling from system dynamics to articulate explicitly a few key underlying processes. We focus on financial markets as a case area, suggesting that recurring regulatory problems in financial markets in the United States over the past 60 years, although differing in specifics, are structurally similar. At the heart of the model is the tension between production goals that focus on short-term, certain, salient benefits and required adherence to production-constraining rules that attempt to mitigate long-term, uncertain, nonsalient risks. It describes systemically how organizations attend to rules depending on the nature of the benefits of production compared with those of rule compliance. The model captures the operative mechanisms responsible for the development of pressures for production and for rule compliance in organizations, providing a structural explanation both for problem-prone organizations characterized by erosion of standards and increased violations and for organizations following rules more reliably. Drawing on studies of institutional work, we conclude by suggesting research on how agency, through strategic and tactical choice, potentially modifies structure in rule compliance.

Keywords: rule change; rule compliance; internal and external regulation; standards erosion; complex systems analysis; qualitative analysis; organizational processes; financial markets; system dynamics (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://dx.doi.org/10.1287/orsc.2013.0847 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:25:y:2014:i:2:p:321-338

Access Statistics for this article

More articles in Organization Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().