Working Paper: CEPR ID: DP3788
Authors: Katharina Pistor; Chenggang Xu
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. 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. We study optimal regime selection between a court and a regulatory regime and present evidence from the history of financial market regulation.
Keywords: financial market; incomplete law; law enforcement; regulation
JEL Codes: G30; K20; K40; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incomplete law (K19) | deterrence failure (K42) |
| deterrence failure (K42) | increased cheating by issuers (G24) |
| incomplete law (K19) | ineffective enforcement by courts (K40) |
| incomplete law (K19) | ineffective enforcement by regulators (G18) |
| larger financial markets (G19) | necessity for regulators (G18) |
| regulators (L51) | mitigate enforcement failures (H26) |
| courts (K40) | ineffective in preventing harm (I12) |