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

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Author Info
Pistor, Katharina
Xu, Cheng-Gang
Abstract

This Paper studies the design of lawmaking 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. 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. 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3788.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3788

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Related research
Keywords: financial market incomplete law law enforcement regulation

Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
K20 - Law and Economics - - Regulation and Business Law - - - General
K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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  2. Mookherjee, Dilip & Png, I P L, 1992. "Monitoring vis-a-vis Investigation in Enforcement of Law," American Economic Review, American Economic Association, vol. 82(3), pages 556-65, June. [Downloadable!] (restricted)
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  4. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
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  7. Priest, George L, 1993. "The Origins of Utility Regulation and the "Theories of Regulation" Debate," Journal of Law & Economics, University of Chicago Press, vol. 36(1), pages 289-323, April.
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  9. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 83-114, January. [Downloadable!] (restricted)
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  15. Victor P. Goldberg, 1976. "Regulation and Administered Contracts," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 426-448, Autumn. [Downloadable!] (restricted)
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  1. Marie Obidzinski & Bruno Deffains, 2006. "Real Options Theory for Law Maker," Working Papers of BETA 2006-04, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
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