The Danger of Not Listening: How Broad-based Business Participation in Government Design of Regulations Can Increase Compliance and Benefit Society

Firms in emerging economies exhibit dangerously low compliance with government regulations aimed at protecting society from the negative externalities of their operations. Weak government enforcement contributes to this lack of compliance, but we argue that the limited legitimacy of government and its regulations also plays a critical role, especially among firms without insider access to key policy makers. We ground our theory development in the procedural justice and deliberative democracy literatures to show how a positive effect on regulatory compliance of participation by a firm in the regulatory design process is mediated by the firm’s view of government legitimacy. Importantly, government itself also plays a pivotal role in this process, as the effect of firm participation on compliance can actually become negative if firms see government as unresponsive to their input. We find empirical support for our theory in analysis of a large-scale survey of firms in the rapidly changing emerging economy of Vietnam.