The Politics of Regulatory Design: Explaining Temporal Variation in Regulatory Regimes'Design Effectiveness

Why do regulatory regimes demonstrate varying levels of design effectiveness over time, even when underlying policy problems remain constant? This question challenges conventional assumptions about regulatory evolution. If policymakers consistently design regimes at the highest effectiveness level their knowledge and capabilities permit, temporal variation should reflect only changes in available knowledge, technology, or understanding of policy problems. Yet regimes often exhibit substantial design changes even when such factors remain stable. This paper examines this puzzle through longitudinal analysis of Israel's Anti-Money Laundering and Counter-Terror Financing (AML/CTF) regime across four timepoints (2002, 2012, 2017, 2025). Israel provides a particularly valuable case: following FATF blacklisting in 2000, Israel established its AML regime under intense external pressure, gaining full FATF membership by 2018. Critically, many design improvements implemented in later years were based on knowledge and international best practices that existed prior to the regime's inception, indicating that factors beyond knowledge acquisition drove design evolution. The paper tests three competing theoretical explanations for temporal variation in design effectiveness. Institutional theory suggests that changes in legal frameworks and legislative procedures alter policymakers' degrees of freedom, enabling or constraining optimal design choices. Public choice theory posits that shifts in political salience and interest groups' power or preferences change the alignment between effective design and policymakers' electoral incentives. Ideational theory argues that evolving ideological preferences, particularly regarding tradeoffs between security and individual rights, shape which design elements policymakers consider acceptable. Methodologically, I employ a comprehensive design effectiveness index comprising three dimensions (regulatory scope, implementation framework, compliance mechanisms) to systematically measure Israel's AML regime design at each timepoint. I use congruence analysis tests which theoretical framework best accounts for observed patterns of change. Preliminary analysis reveals notable variation in how different regime elements evolved: for instance, reporting thresholds at border crossings underwent significant risk-based recalibration, while professional services (lawyers and accountants) remained excluded from core reporting obligations despite international standards and documented money laundering risks. This research makes three contributions. First, it advances theoretical understanding regulatory design by identifying which factors, institutional constraints, political incentives, or ideological shifts, drive design evolution and enhance or hinder improvements in design effectiveness. Second, it demonstrates the application of the design effectiveness index as a methodological tool to evaluate design effectiveness distinctly from outcome or impact and systematically compare design effectiveness levels of a regulatory regime at different timepoints, addressing a persistent gap in contemporary regulatory studies.