Decision Analysis Theory

In: Business and Management

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Public interest theory seeks to establish a method of understanding the interests of public groups based on a number of assumptions. Typically actions that are deemed in the public interest generally occur when governments seek to intervene in situations where market failure occurs. Market failure may arise due to monopolies, barriers to entry for new businesses, and information gaps. Public interest theory makes three assumptions. First, interest of consumers is translated into legislative action through operation of the internal marketplace. Secondly, agents will seek regulation on behalf of public interest. The third assumption being that government has no independent role to play in the development of regulation. In 2002 the Sarbanes-Oxley Act was created in America to enforce greater regulation and compliance for financial reporting and corporate governance. This Act was created in response to corporate scandals involving larger companies like Enron and Tyco International, and thus public interest theory suggests the government’s response was as a result of market failure due to inaccurate auditing and accounting procedures. The premise of private interest theory is that governmental bodies and political leaders use their power to coerce businesses through taxation, regulation, and subsidies. The Basic assertion of privation interest theory is the law of diminishing returns which exists between group size, and costs of using political process. A second assumption is government officials are rationally self-interested. Politicians seek re-election therefore it is in their self-interest to sell their right to coerce to enhance electoral success. It could be argued that the establishment of the Accounting Standards Review Board (ASRB) is an example of private interest theory of regulation. Private interest in the ASRB stems from the Ministerial Council which…...

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