Made to be Broken? A Theory of Regulatory Governance and Rule-Breaking Entrepreneurial Action

Author Information:

David S. Lucas, Department of Entrepreneurship & Emerging Enterprises, Whitman School of Management, Syracuse University
Caleb S. Fuller, Department of Economics, Grove City College
Mark D. Packard, Department of Management, College of Business, Florida Atlantic University

Year of Publication:

Journal of Business Venturing (2022)

Summary of Findings:

We provide a framework for understanding rule-breaking entrepreneurial action, defined as behavior aimed at launching and growing new ventures whose primary products, activities, or processes are inconsistent with law, regulation, or other state-provided rules.

Research Questions:

If regulatory institutions enable and constrain entrepreneurial action, how is it that ventures frequently emerge with products, processes, and business models that skirt or defy these rules?

What we know:

We know that rules matter. In particular, state-issued laws and regulations ("regulatory rules") are commonly viewed as a key influence on the emergence and performance of new ventures—constraining and enabling entrepreneurial action. Yet, rule-breakers like Uber, Aereo, and others increasingly introduce products and processes that seem to eschew those regulatory rules. Such ventures are intriguing in that they are engaging in voluntary exchange with consumers (unlike theft or other coercive forms of rule-breaking)—but in ways deemed potentially impermissible by the state. Hence, while we know that rule-breaking ventures "can" emerge, we know little about the legal, social, and actor-level conditions that facilitate this emergence. Our paper provides a systematic account of these features.

Novel Findings:

Our conceptual framework offers a novel account of the relationship between entrepreneurial actors and the legal environment. We emphasize that rules are not "automatically" enforced or even understood; rather, many public actors (legislators, regulatory agencies, courts, etc.) are involved in the creation and enforcement of rules. Furthermore, private actors—what we call "legal intermediaries"—play a key role in shaping what the rules mean in practice; we call this "institutional interpretation." We explain how these features imply that rule enforcement and interpretation can vary; furthermore, it is variance on these two margins that facilitates rule-breaking entrepreneurial action of various kinds. Finally, we connect these ideas to the actor-level role of knowledge and moral motivations with respect to the law, offering a process model of how particular actors recognize and choose to try and exploit those legal imperfections that are amenable to rule-breaking entrepreneurial action. Our work changes the way scholars think about regulatory rules and entrepreneurship and illuminates exciting new directions for research on entrepreneurship and the law.

Full Citations:

Lucas, David S., Caleb S. Fuller, and Mark D. Packard. “Made to be broken? A theory of regulatory governance and rule-breaking entrepreneurial action.” Journal of Business Venturing (in press).

Abstract:

Although regulatory institutions are said to enable and constrain entrepreneurial action, ventures frequently emerge with products, processes, and business models that skirt or defy these rules. We provide a theory of rule-breaking entrepreneurial action, focusing on why entrepreneurs are only sometimes constrained by law, regulation, and other formal constraints. In this, we attend to the dual roles of social context and subjective interpretation. Drawing on the sociology of law, we position regulatory rules within a system of governance, where public actors and legal intermediaries collectively construct the meaning of rule compliance and enact sanctions to enforce this interpretation. We leverage this to describe how enforcement imperfections and heterogeneous rule interpretations give rise to the possibility of ‘black market’ and ‘gray market’ entrepreneurial actions. In turn, we theorize how actors’ knowledge and motivations can lead them to identify and exploit breakable rule conditions via the creation of new ventures. We illustrate our framework with examples from startups Zenefits, Square, and Aereo. Our framework changes the way we think about regulatory institutions and entrepreneurial action by presenting governance as a multilevel, social, and subjective process—such that some actors conform their entrepreneurial activities to established rules while others recognize and exploit breakable rule conditions.