The Regulatory Trade-Off in Real & Financial Markets
Issue:
Volume 2, Issue 3, June 2013
Pages:
17-22
Received:
28 June 2013
Published:
30 July 2013
DOI:
10.11648/j.eco.20130203.11
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Abstract: It remains undeniable that the regulatory framework in place prior to the financial crisis is built on a flawed system. But does this automatically suggest that more regulation is better? In general, we have to distinguish between the quantity and quality of rules and in particular, the enforcement. The last issue does not necessarily mean we need more regulation – sometimes a better enforcement is enough. Still there remains the question about the degree of regulation. This paper builds a new theory on the optimal degree of the regulatory trade-off. We elucidate the optimal degree of efficacy in financial regulation and compare it with the optimal degree in goods market regulation. We prove that financial regulation does not follow a simple economic trade-off by costs and benefits. In finance, the regulatory trade-off is a boundary solution, i.e. the efficient solution is either no regulation or comprehensive regulation. Either way you prefer, financial markets must be regulated differently in comparison to the real economy.
Abstract: It remains undeniable that the regulatory framework in place prior to the financial crisis is built on a flawed system. But does this automatically suggest that more regulation is better? In general, we have to distinguish between the quantity and quality of rules and in particular, the enforcement. The last issue does not necessarily mean we need ...
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