Relevance and Need for International Regulatory Standards

Abstract

informational networks makes strategic complementarities commonplace. These complementarities mean that coordinating the actions of competing institutions can manifestly increase their aggregate marginal return. However, increased coordination may or may not improve social welfare. Cooperative behavior can improve the industry’s marginal return in two very different ways: (1) by increasing the perceived quality of regulatee products by enhancing at low cost the confidence and convenience they offer to consumers or (2) by fostering cartel or subsidy arrangements that increase industry revenues at the expense of the welfare of parties in other sectors of the economy. Regulators cut through and reorient individual-producer preferences by adopting tandem strategies of rulemaking and enforcement. Their modus operandi is not to brutally force each regulatee to obey their dictates, but to restructure regulatees’ incentives in hopes of making compliance in their best interests. Cutting away pieces of others’ incentives is a delicate art that inevitably produces both predicted and unpredicted effects. Whether one is prepared to view all allegedly unpredicted effects as truly unintended depends on one’s theory of the regulatory process. Public interest theory views a nation’s regulators as faithful agents for society that single-mindedly pursue the common good. In this theory’s ideal world, financial regulators seek to