Self-Regulation and Government Oversight
Self-regulation is a feature of a number of professions. For example, in the U.S. the government delegates aspects of financial market regulation to self-regulatory organizations (SROs) like the New York Stock Exchange and the National Association of Securities Dealers. We analyse one regulatory tas...
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Published in | The Review of economic studies Vol. 72; no. 3; pp. 687 - 706 |
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Main Authors | , , |
Format | Journal Article |
Language | English |
Published |
Wiley-Blackwell
01.07.2005
Review of Economic Studies Ltd |
Subjects | |
Online Access | Get full text |
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Summary: | Self-regulation is a feature of a number of professions. For example, in the U.S. the government delegates aspects of financial market regulation to self-regulatory organizations (SROs) like the New York Stock Exchange and the National Association of Securities Dealers. We analyse one regulatory task of an SRO, enforcing antifraud rules so agents will not cheat customers. Specifically, we model contracting/enforcement as a two-tier problem. An SRO chooses its enforcement policy: the likelihood that an agent is investigated for fraud and a penalty schedule. Given an enforcement policy, agents compete by offering contracts that maximize customers' expected utility. We assume that the SRO's objective is to maximize the welfare of its members, the agents. We show that the SRO chooses a more lax enforcement policy—meaning less frequent investigations—than what customers would choose. A general conclusion is that control of the enforcement policy governing contracts confers substantial market power to a group of otherwise competitive agents. We also investigate government oversight of the self-regulatory process. The threat of government enforcement leads to more enforcement by the SRO, just enough to pre-empt any government enforcement. |
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Bibliography: | ark:/67375/HXZ-8G5Q4PZN-D istex:765996D158D5FFCC3811EA2AA5031CD087D09FB8 ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 |
ISSN: | 0034-6527 1467-937X |
DOI: | 10.1111/j.1467-937X.2005.00348.x |