Density-Dependent Dynamics in Regulated Industries: Founding Rates of Banks and Life Insurance Companies

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Density-Dependent Dynamics in Regulated Industries: Founding Rates of Banks and Life Insurance Companies The theory of density-dependent legitimation and competition has been tested on numerous organizational populations, including labor unions, newspapers, semiconductor manufactureres, voluntary social service organizations, wineries, and breweries. Despite this impressive diversity, we do not yet know whether processes of density dependence are sufficiently general to apply to all kinds of organizational populations. Several challenges to the scope of this theory deserve consideration. These include arguments that it applies only to nonbusiness organizations and to systems of unregulated interaction. This paper addresses these matters by analyzing founding rates of Manhattan banks during 1791-1980 and American life insurance companies during 1759-1937.

The first challenge comes from a study of mortality rates in the post-Prohibition wine industry in California. Delacroix, Swaminathan, and Solt (1989) claimed that the theory of density dependence used in prior research does not apply to populations of business organizations because legitimation is not problematic for them. If so, this is a majory limitation on the scope of the theory. Yet, the implications of the theory have been shown to hold for some populations that one normally thinks of as including business firms, e.g., newspaper publishers and brewing films, as we discuss below. The failure of the theory to explain mortality rates in the population of California wineries appears to reflect use of a poor research design, one that ignores the establishment of the wine industry in California and other states prior to 1940 (Carroll and Wade, 1991). Nonetheless, the claim that the theory does not apply to business firms has gaines some favor and ought to be considered more extensively.

A second challenge claims that ecological theory applies only in the context of classical markets and thus specifically to some kinds of business firms. This view holds that the theory applies only when many small and individually powerless organizations engage in competition free of regulation by the state or other external actors (Perrow, 1986). A sophisticated version of this view is reflected in Meyer and Scott's (1983) distinction between technical and institutional societal sectors and their claim that ecological arguments apply to the former and institutional arguments to the latter. If organizational ecology's scope covers only deregulated and undominated competition, ecological models would fail when applied to populations that have encountered substantial government regulation over their histories.

A third issue of general importance concerns a distinction between two forms of legitimation and its relevance to dynamics of organizational populations. The theory of density dependence has borrowed from institutional theory a cognitive view of processes of legitimation. According to this view, a powerful form of legitimation involves an organizational form's gaining unquestioned acceptance as the way to conduct a certain kind of activity, being taken for granted. Legitimation in institutional theory also refers to formal legal standing, as coded in laws, charters, regulations, and so forth. Empirical work on institutionalization of organizations has concentrated on such formal legitimation, thereby giving the impression that legal standing is the dominant or even the sole dimension. If the legal dimension does dominate, then models built on representations of processes of cognitive legitimation will prove useless.

For these varied reasons, testing the applicability of the theory of density dependence to populations of banks and insurance companies is especially intriguing as a test of the scope of the theory. As we sketch below, the population of banks studied has been subject to extensive regulation by the state and the federal government, and the population of life insurance companies has experienced state regulation. …