Self-regulation versus government regulation: an externality view
- PDF / 346,262 Bytes
- 18 Pages / 439.37 x 666.142 pts Page_size
- 87 Downloads / 174 Views
Self-regulation versus government regulation: an externality view Chang Ma1 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Who should be responsible for industry regulation, a private self-regulatory agency or a public agency? This paper provides a simple framework to analyze the optimal scope of a private self-regulatory organization (SRO) versus government regulation. The trade-off depends on three key elements: externalities, monopoly distortions, and the degree of asymmetric information. Self-regulation is more desirable than government regulation if the degree of asymmetric information between the public regulator and private industry is larger than the size of the monopoly distortion and externalities from the industry to society. An optimal mechanism consists of both self-regulation and government regulation where an SRO internalizes externalities within the industry and the government corrects any distortions generated by the SRO. These insights can be applied to many practical settings and policy discussions—for example, in the context of the financial sector, as with the Financial Industry Regulatory Authority. Keywords Self-regulation · Government regulation · Externalities JEL Classification L51 · K20 · D62
“As I have stated before, it is the private sector, not the public sector, that is in the best position to provide effective supervision.”1 — Larry Summers in 2000
1 See “Remarks of Treasury Secretary Lawrence H. Summers to the Securities Industry Association” on Nov. 9, 2000 at http://www.treasury.gov/press-center/press-releases/Pages/ls1005.aspx.
I am grateful to Anton Korinek, Olivier Jeanne, Laurence Ball, and Jon Faust for their encouragement and stimulating discussions. All errors are my own. I acknowledge financial support sponsored by Shanghai Pujiang Program.
B 1
Chang Ma [email protected] Fanhai International School of Finance (FISF), Fudan University (FISF), Shanghai 200433, China
123
C. Ma
“No substantially interconnected institution or market on which the system depends should be free from rigorous public scrutiny.”2 — Larry Summers in 2009
1 Introduction Self-regulation has been a feature for many industries and professions throughout the world. For example, all firms dealing with securities in the U.S. are required to be members in one of those two self-regulatory organizations (SROs): Financial Industry Regulatory Authority (FINRA) or the Municipal Securities Rulemaking Board. These SROs license their members, write and examine rules for market players, and are also subject to government regulation.3 Such an arrangement is not unique for security markets but also exists in other sectors such as the nuclear and chemical industry. Interestingly, a similar arrangement is prevalent in many professions such as accounting, law and medicine. Moreover, self-regulation is a worldwide phenomenon. For example, the Swiss Banker Association plays an important role in implementing banking regulation in Switzerland, and the Advertising Standards Authority
Data Loading...
