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Self-Regulation and Government Oversight

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  • Peter M. DeMarzo
  • Michael J. Fishman
  • Kathleen M. Hagerty

Abstract

Self-regulation is a feature of a number of professions. For example, in the U.S. the government delegates aspects of financial market regulation to self-regulatory organizations (SROs) like the New York Stock Exchange and the National Association of Securities Dealers. We analyse one regulatory task of an SRO, enforcing antifraud rules so agents will not cheat customers. Specifically, we model contracting/enforcement as a two-tier problem. An SRO chooses its enforcement policy: the likelihood that an agent is investigated for fraud and a penalty schedule. Given an enforcement policy, agents compete by offering contracts that maximize customers' expected utility. We assume that the SRO's objective is to maximize the welfare of its members, the agents. We show that the SRO chooses a more lax enforcement policy—meaning less frequent investigations—than what customers would choose. A general conclusion is that control of the enforcement policy governing contracts confers substantial market power to a group of otherwise competitive agents. We also investigate government oversight of the self-regulatory process. The threat of government enforcement leads to more enforcement by the SRO, just enough to pre-empt any government enforcement. Copyright 2005, Wiley-Blackwell.

Suggested Citation

  • Peter M. DeMarzo & Michael J. Fishman & Kathleen M. Hagerty, 2005. "Self-Regulation and Government Oversight," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 687-706.
  • Handle: RePEc:oup:restud:v:72:y:2005:i:3:p:687-706
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2005.00348.x
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    Cited by:

    1. Bijlsma, Michiel & Boone, Jan & Zwart, Gijsbert, 2017. "The complementarity between risk adjustment and community rating: Distorting market outcomes to facilitate redistribution," Journal of Public Economics, Elsevier, vol. 155(C), pages 21-37.
    2. Boone, Jan, 2015. "Basic versus supplementary health insurance: Moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 128(C), pages 50-58.
    3. Anirudh Burman & Shubho Roy, 2015. "Building an institution of insolvency practitioners in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-033, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Michiel Bijlsma & Jan Boone & Gijsbert Zwart, 2014. "Competition leverage: how the demand side affects optimal risk adjustment," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 792-815, December.
    5. Sofia Johan, 2008. "Global Market Surveillance," American Law and Economics Review, Oxford University Press, vol. 10(2), pages 454-506.
    6. Kolesnik, Georgiy, 2015. "Modelling "race to the bottom" effect on the self-regulated markets," MPRA Paper 64138, University Library of Munich, Germany.
    7. Boone, J., 2014. "Basic Versus Supplementary Health Insurance : Moral Hazard and Adverse Selection," Other publications TiSEM 6bf0e55c-e004-4c9e-8065-6, Tilburg University, School of Economics and Management.
    8. Jos頌uis Lima & Javier Nú, 2015. "Does self-regulation work? Experimental evidence of the reputational incentives of Self-Regulatory Organizations," Applied Economics, Taylor & Francis Journals, vol. 47(41), pages 4423-4441, September.
    9. Boone, J., 2014. "Basic versus Supplementary Health Insurance : The Role of Cost Effectiveness and Prevalence," Discussion Paper 2014-065, Tilburg University, Center for Economic Research.
    10. Bendikov, Mikhail & Kolesnik, Georgiy, 2013. "Конкуренция Саморегулируемых Организаций И Эффективность Рынков [Self-regulatory organizations competition and the market efficiency]," MPRA Paper 47812, University Library of Munich, Germany.
    11. Boone, J., 2014. "Basic versus Supplementary Health Insurance : The Role of Cost Effectiveness and Prevalence," Other publications TiSEM be4cbf5b-f13b-460a-a9cc-1, Tilburg University, School of Economics and Management.
    12. Boone, J., 2014. "Basic Versus Supplementary Health Insurance : Moral Hazard and Adverse Selection," Other publications TiSEM 8ad45428-2ab4-406f-bbd3-3, Tilburg University, School of Economics and Management.
    13. Michał Krawczyk & Krzysztof Szczygielski, 2019. "Do professions curb free-riding? An experiment," European Journal of Law and Economics, Springer, vol. 47(3), pages 361-376, June.
    14. Silvester Van Koten & Andreas Ortmann, 2013. "Self-regulating organizations under the shadow of governmental oversight: An experimental investigation," Discussion Papers 2013-13, School of Economics, The University of New South Wales.
    15. Silvester Van Koten & Andreas Ortmann, 2016. "Self-Regulatory Organizations under the Shadow of Governmental Oversight: An Experimental Investigation," Research in Experimental Economics, in: Sebastian J. Goerg & John R. Hamman (ed.),Experiments in Organizational Economics, volume 19, pages 85-104, Emerald Publishing Ltd.
    16. Boone, Jan, 2018. "Basic versus supplementary health insurance: Access to care and the role of cost effectiveness," Journal of Health Economics, Elsevier, vol. 60(C), pages 53-74.
    17. Diamond, Stephen F. & Kuan, Jennifer W., 2018. "Are the stock markets “rigged”? An empirical analysis of regulatory change," International Review of Law and Economics, Elsevier, vol. 55(C), pages 33-40.
    18. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "Exchange trading rules, surveillance and suspected insider trading," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 311-330.
    19. Silvester Van Koten, 2015. "Self-Regulatory Organizations Under the Shadow of Governmental Oversight: Blossom Or Perish?," RSCAS Working Papers 2015/84, European University Institute.
    20. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, C.E.P.R. Discussion Papers.
    21. Carole Comerton-Forde & Tālis J. Putniņš, 2014. "Stock Price Manipulation: Prevalence and Determinants," Review of Finance, European Finance Association, vol. 18(1), pages 23-66.
    22. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2013. "Exchange trading rules, surveillance and insider trading," CFS Working Paper Series 2013/15, Center for Financial Studies (CFS).

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