Hazards of industry self-regulation: Design lessons from FAA and Boeing

Two fatal disasters and several near misses experienced by Boeing manufactured airplanes in recenttimes have undermined public trust in the manufacturer as well as the regulator (Federal AviationAuthority; henceforth FAA). In response, the FAA has promised stricter oversight to improvesafety. This study maintains that stricter FAA oversight alone is unlikely to address safety concernsas the regulatory governance structure is flawed. The current structure focuses on the boundedrationality problem of effective oversight stemming from concerns such as the lack of FAA’sexpertise while glossing over opportunism problems. In other words, the regulatory governancestructure puts too much trust in Boeing. To address this flaw, this study offers five designprinciples that consider both the bounded rationality and the opportunism problems. Theseprinciples can be extended to other industry contexts where self-regulation is prevalent.