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Law Enforcement under Incomplete Law: Theory and Evidence from Financial Market Regulation

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  • Katharina Pistor
  • Chenggang Xu
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    Abstract

    This paper studies the design of law-making and law enforcement institutions based on the premise that law is inherently incomplete. Under incomplete law, law enforcement by courts may suffer from deterrence failure, defined as the social-welfare loss that results from the regime's inability to deter harmful actions. As a potential remedy a regulatory regime is introduced. The major functional difference between courts and regulators is that courts enforce law reactively, that is only once others have initiated law enforcement procedures, while regulators enforce law proactively, i.e. on their own initiative. Proactive law enforcement may be superior in preventing harm. However, it incurs high costs and may err in stopping potentially beneficial activities. We study optimal regime selection between a court and a regulatory regime and present evidence from the history of financial market regulation.

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    File URL: http://sticerd.lse.ac.uk/dps/te/te442.pdf
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    Bibliographic Info

    Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number 442.

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    Date of creation: Dec 2002
    Date of revision:
    Handle: RePEc:cep:stitep:442

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    Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

    Related research

    Keywords: Incomplete law; law enforcement; financial market; regulation.;

    This paper has been announced in the following NEP Reports:

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    Cited by:
    1. Lopez-de-Silanes, Florencio, 2004. "A survey of securities laws and enforcement," Policy Research Working Paper Series 3405, The World Bank.
    2. Hokky Situngkir, 2004. "The Structural Dynamics of Corruption: Artificial Society Approach," Computational Economics 0405002, EconWPA.
    3. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2003. "What Works in Securities Law?," NBER Working Papers 9882, National Bureau of Economic Research, Inc.
    4. Djankov, Simeon & Glaeser, Edward & La Porta, Rafael & Lopez de Silanes, Florencio & Shleifer, Andrei, 2003. "The new comparative economics," Policy Research Working Paper Series 3054, The World Bank.
    5. Tong, Jian & Xu, Cheng-Gang, 2004. "Financial Institutions and the Wealth of Nations: Tales of Development," CEPR Discussion Papers 4348, C.E.P.R. Discussion Papers.
    6. Beck, T.H.L. & Levine, R., 2005. "Legal institutions and financial development," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3508406, Tilburg University.

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