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Law enforcement under incomplete law: theory and evidence from financial market regulation

Pistor, Katharina and Xu, Cheng-Gang (2002) Law enforcement under incomplete law: theory and evidence from financial market regulation. TE/02/442. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2002 by the authors
Library of Congress subject classification: H Social Sciences > HG Finance
K Law > K Law (General)
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance
K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior
N - Economic History > N2 - Financial Markets and Institutions
K - Law and Economics > K2 - Regulation and Business Law
Sets: Collections > Economists Online
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: TE/02/442
Date Deposited: 10 Mar 2008 11:38
URL: http://eprints.lse.ac.uk/3748/

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