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Self-Regulatory Organizations Under the Shadow of Governmental Oversight: Blossom Or Perish?

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  • Silvester Van Koten

Abstract

Self-Regulatory Organizations (SROs) have been argued to be afflicted with incentive-incompatibility problems and, indeed, they have a mixed record in their ability to curb market abuse. An earlier theoretical study by DeMarzo et al. (2005), however, finds that SROs, under the oversight of the government, may overcome these incentive-incompatibility problems and may deliver the same degree of oversight as the government would have delivered without the SRO, but against lower costs. I find that this result hinges on the assumption that the interaction between the SRO and the government can be characterized as a game of sequential moves with the SRO moving first and the government moving second. For institutional settings where it is more appropriate to characterize the interaction as a game of simultaneous moves, I obtain the inefficient result that oversight by the government fully crowds out oversight by the SRO. A possible remedy is suggested.

Suggested Citation

  • Silvester Van Koten, 2015. "Self-Regulatory Organizations Under the Shadow of Governmental Oversight: Blossom Or Perish?," RSCAS Working Papers 2015/84, European University Institute.
    • Handle: RePEc:rsc:rsceui:2015/84
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2013-13.pdf
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    File URL: http://hdl.handle.net/1814/39933
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    References listed on IDEAS

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    More about this item

    Keywords

    Self-Regulatory organizations; regulation; governmental oversight; simultaneous versus sequential games; costly state verification.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations

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