Regulators should dedicate more resources to pursuing big cases against the biggest market actors, even if it means compiling far fewer enforcement actions annually. Regardless of the legal outcome, pursuing a few big cases would come with positive externalities in the form of better reputational and moral deterrence.

“Big is bad because it is ungovernable” has become a rallying cry for today’s antimonopoly movement. Giant corporations with market power treat legal requirements as mere recommendations and routinely engage in behavior that harms others as long as it maximizes their own bottom line, the argument goes. It follows, then, that we need to break them up or regulate them more intensely. 

The big-is-ungovernable claim has by now firmly entered policy circles. For example, in 2020 a congressional subcommittee investigating the conduct of big tech platforms maintained that the big platforms (Google, Amazon, Facebook, and Apple) leverage their power to shape the regulatory framework that governs them, and repeatedly violate existing laws and court orders. 

While the stakes of the big is ungovernable claim are high, the claim as currently construed is underdeveloped. In fact, there exist numerous theoretical and empirical analyses suggesting that big is more governable. Larger corporations are more publicly visible, increasing the probability that any misconduct would be detected. Big corporations also ostensibly have more to lose from being caught misbehaving, from higher punitive damages in court to greater reputational fallout in the marketplace. To what extent, then, is big truly ungovernable?  

My new article, titled “The Challenge of Holding Big Business Accountable,” explores this question from a holistic perspective, taking into account not just legal but also reputational and moral deterrence. Existing accounts of the problems with deterring corporate wrongdoing tend to be single-institutional: they focus, for example, on how settled concepts in criminal law make it ill-equipped to deal with modern mammoth-sized corporations, or how giant corporations use their economic power to capture regulation. But in reality, corporate deterrence comes from the interactions between public enforcement, media scrutiny, social and professional norms, and reputational concerns. Even if a super-large corporation manages to influence the regulatory framework and is “too big to jail,” said corporation may still be more likely to behave according to market and societal norms, because of nonlegal forces such as fear of employee walkouts or consumer backlashes. Thinking about corporate deterrence holistically allows us to identify the areas that are more worrisome and those that are more fixable from a societal perspective.

Take, for example, the issue of whether the threat of reputational fallouts effectively disciplines the behavior of giant corporations with market power. In standard law-and-economics accounts, big means better reputational discipline: giant corporations have a big reputational cache to protect, and would therefore invest their vast resources in internal compliance that ferret out wrongdoing. A firm that sells many products puts its entire reputation on the line whenever a single product is sold. Therefore, the more products a firm sells, the more valuable its reputation for product market becomes. 

Beyond larger corporations having more to lose, the conventional wisdom also suggests that larger corporations face higher certainty that their misconduct will be detected. After all, larger corporations have more interactions with stakeholders: more employees, more buyers, and a bigger public footprint. With more interactions comes a higher likelihood that one of these stakeholders will notice a negative event. Additionally, the largest corporations tend to attract the most coverage by media outlets, corporate watchdogs, stock analysts, and sophisticated institutional investors.

But a closer look reveals the cracks in this common “reputation economies of scale” argument. For one, conventional wisdom focuses on how much the largest firms have to lose from violating market norms, but neglects how difficult it is for stakeholders to gain from “punishing” large firms that have market power. Reputational discipline is the process of stakeholders learning about corporate misbehavior, downgrading their beliefs about the misbehaving company, and switching to competitors. Concentration reduces the number of viable alternatives, thereby increasing the costs for market actors of switching to competitors. A recent empirical study illustrates this point by examining how news about misbehavior by retail outlets affected consumer willingness to patronize the outlets going forward. The study found that the reputational sanction depends strongly on the level of competition in the market. In other words, outlets that face less competition experience smaller drops in consumer visits following scandals. 

“It is exactly in these circumstances—a combination of market power, externalities, and information asymmetries—that market discipline fails and we need laws and morals the most.”

While it is true that the biggest corporations have the strongest incentives to protect their reputation, this common observation underplays how giant corporations can protect their reputation not necessarily by behaving honestly but rather by managing appearances. Super-large corporations can pour vast resources into blocking damning information about them from getting out, and cast doubt on the veracity of information that does come out (“manage the meaning”). Only the largest corporations can utilize a specialized PR division, enjoy the benefit of having all the top experts in a given field on retainer, and fund think tanks and nonprofit advocacy groups to steer policy discussions in their favor. In other words, the largest corporations are the ones most effective in “manufacturing doubt,” which in turn delays the prospect of reputational fallouts. Using the DuPont-PFOA debacle (where the chemical giant emitted for decades an extremely toxic chemical in the process of manufacturing Teflon) as a case study, Luigi Zingales and I showed just how much such an ability to delay enforcement dilutes the effectiveness of deterrence. 

To be sure, in many areas the evidence suggests that big corporations are indeed more deterred by the prospect of reputational fallouts than small and mid-sized corporations. These areas usually involve issues with high saliency and low complexity, such as board diversity. When transgressions are vivid and easy to understand, big corporations anticipate a large reputational fallout (if not from consumers, from regulators), which incentivizes them to ensure compliance to begin with. By contrast, when the issue flies under the radar and harms are remote, big corporations can count on their ability to dilute the expected legal and reputational sanctions for misbehaving. 

To recast the example of DuPont: during the same period that the chemical giant emitted the extremely toxic PFOA, it also led several environmentally friendly initiatives, such as voluntarily halting production of chemicals suspected of destroying the ozone layer and ending its work on nuclear weapons. The difference is that while the ozone layer and nuclear weapons were the hottest (and easiest to understand) “ESG” issues of that time (the 1980s), PFOA was a lab-made chemical, whose existence (not to mention ramifications) was a closely guarded secret among a relatively small group of industry experts. Further, the risks from opaque chemicals remain relatively invisible for many years, and even when they materialize, it is hard to assign accountability to specific individuals. 

It is exactly in these circumstances—a combination of market power, externalities, and information asymmetries—that market discipline fails and we need laws and morals the most. Yet, as I detail in the article, bigness makes establishing legal liability harder and moral disengagement easier. When reputational deterrence breaks, there is little that stops Big Business from pursuing the strategy that maximizes its bottom line—even if it is inimical to broader societal interests. 

Recognizing the challenges that bigness presents to laws, markets, and morals, underscores the need for a shift in regulators’ enforcement priorities. Regulators should dedicate more resources to pursuing big cases against the biggest market actors, even if it means compiling far fewer enforcement actions annually. 

Pursuing a few big cases would come with positive externalities in the form of better reputational- and moral deterrence. Regardless of the outcome, the process itself tends to inject quality information into the market on the behavior of the most important actors. To illustrate, in a previous study I showed that the majority of prizewinning investigative reports rely heavily on “legal sources” such as documents exchanged in discovery or regulatory investigation reports. The process also provides opportunities for judges and regulators to signal what is considered proper or improper behavior. Readers of this publication may recall recent declarations by FTC Chair Lina Khan and DOJ Antitrust Head Jonathan Kanter, suggesting that they are indeed heading in the direction of prioritizing hard cases against the market’s biggest actors. 

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