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LAW ENFORCEMENT UNDER INCOMPLETE LAW: Theory and Evidence from Financial Market Regulation

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Author Info
Katharina Pistor
Chenggang Xu
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 socialwelfare 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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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 791.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:791

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Related research
Keywords: Incomplete law; law enforcement; financial market; regulation;

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Find related papers by JEL classification:
G3 - Financial Economics - - Corporate Finance and Governance
K2 - Law and Economics - - Regulation and Business Law
K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
N2 - Economic History - - Financial Markets and Institutions

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  14. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
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  16. 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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