The Costs and Benefits of Financial Market Regulation

Abstract

This paper revisits the controversy on regulation and applies its insights to the debate on corporate governance and mutual funds. The general result of this exercise is that a strong case can be made in favor of more mandatory disclosure. While theoretically there is scope also for other mandatory regulation, it is unclear whether its benefits exceed its costs. Furthermore, it is difficult to see how this ideal regulation could emerge from the political process, which tends to be dominated by incumbent firms. I propose a mechanism to reduce this bias.