Volume 2, Issue 3, June 2013, Page: 17-22
The Regulatory Trade-Off in Real & Financial Markets
Bodo Herzog, Economics Department, Institute of Finance and Economics (IFE), Reutlingen, Germany;ESB Business School, Reutlingen University, Germany;Reutlingen Research Institute (RRI), Reutlingen University, Germany
Received: Jun. 28, 2013;       Published: Jul. 30, 2013
DOI: 10.11648/j.eco.20130203.11      View  2115      Downloads  134
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.
Keywords
Financial Regulation, Moral Hazard, Externalities and Optimality of Regulation
To cite this article
Bodo Herzog, The Regulatory Trade-Off in Real & Financial Markets, Economics. Vol. 2, No. 3, 2013, pp. 17-22. doi: 10.11648/j.eco.20130203.11
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