Work

The problem of regulatory arbitrage: A transaction cost economics perspective

Year: 2019

Type: article

Abstract: Regulatory arbitrage, or the ability of financial firms to circumvent or neutralize rules, is a classic problem of financial regulation. This article draws on transaction cost economics (TCE) to reformulate this old problem, thus defining regulatory arbitrage as a contracting hazard arising from interactions between the regulator and regulated firms, given bounded rationality and opportunism. Following standard TCE, the article first characterizes the implicit regulatory contract in finance, focusing in particular on the mobile and elastic nature of regulated actors and financial assets as well as the contested utility of financial innovation. It is then argued that this incomplete and hazard‐prone regulatory bargain must be matched with a governance structure that both adapts to unforeseen circumstances and avoidance strategies and copes with radical uncertainty about the welfare consequences of financial innovation. To that end, the article discusses how a governance structure here termed “relational regulation” might facilitate such ex post governance under uncertainty.

Source: Regulation & Governance

DOI: 10.1111/rego.12287

Author: Heikki Marjosola

Institution: University of Helsinki

Language: English

Topic: Global Financial Regulation and Crises

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: green

Funder: Vetenskapsrådet