Self-Regulation versus Government Regulation: An Externality View

34 Pages Posted: 23 Sep 2018 Last revised: 29 Jul 2020

See all articles by Chang Ma

Chang Ma

Fudan University - Fanhai International School of Finance (FISF)

Date Written: September 1, 2018

Abstract

Who should be responsible for industry regulation, a private self-regulatory agency or a public agency? This paper provides a simple framework to analyze the optimal scope of a private self-regulatory organization (SRO) versus government regulation. The trade-off depends on three key elements: externalities, monopoly distortions, and the degree of asymmetric information. Self-regulation is more desirable than government regulation if the degree of asymmetric information between the public regulator and private industry is larger than the size of the monopoly distortion and externalities from the industry to society. An optimal mechanism consists of both self-regulation and government regulation where an SRO internalizes externalities within the industry and the government corrects any distortions generated by the SRO. These insights can be applied to many practical settings and policy discussions — for example, in the context of the financial sector, as with the Financial Industry Regulatory Authority (FINRA).

Keywords: Self-Regulation; Government Regulation; Externalities

JEL Classification: L51; K20; D62

Suggested Citation

Ma, Chang, Self-Regulation versus Government Regulation: An Externality View (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=3242591 or http://dx.doi.org/10.2139/ssrn.3242591

Chang Ma (Contact Author)

Fudan University - Fanhai International School of Finance (FISF) ( email )

China

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