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About this book

This book explores current issues regarding the regulation of various economic sectors, theoretically and empirically, discussing both neoclassical and behavioural economics approaches to regulation. Regulation has become one of the main determinants of modern economies, and virtually every sector is subject to general laws and regulations as well as specific rules and standards. A traditional argument to justify regulatory interventions is the promotion of public interests. Fixing markets that lack competition, balancing information asymmetries, internalising externalities, mitigating systemic risks, and protecting consumers from irrational behaviour are frequently invoked to complement the invisible hand of the market with the visible hand of the state.However, regulations can lead to unintended consequences, and serve the interests of powerful private interest groups rather than the public interest and social welfare. In addition, new insights from behavioural economics question the traditional regulatory approaches, most prominently in attitudes towards consumers. Furthermore, digitalisation and technological innovation in general present new challenges in terms of both the type of regulation and the regulatory process.Part I of this book discusses various theoretical approaches to the economic analysis of regulations, while Part II looks at specific applications of the law and economics of regulation.

Table of Contents

Frontmatter

Law and Economics of Regulation Theory

Frontmatter

Public Services as a Strategy of Regulation

Abstract
When legal regulations are considered, it is very unusual to analyze public services as a regulatory strategy. They are certainly a way for the “state” to intervene in the economy but most efforts by academics, lawyers and policy makers focus on the way to regulate them—from the condition of their creation to their reach and impact on competition—using orthodox (e.g. command and control or economic incentives) or heterodox (e.g. mandated disclosure or nudges) regulatory strategies. Under this traditional conceptualization, public services should be defined by the nature of the service they are providing, the nature having then an influence on the regulation of that service. The purpose of this paper is to reverse our perspective of public services regarding their relation vis-à-vis regulation. Public services are not mere services which need to be regulated keeping an eye on the influence of that regulation on distortion of competition, they are, essentially, a type of regulation. Not only is this approach more coherent with the use of this notion by European institutions and its practical legal relevance, it also forces us to reconsider the relevance of public services (as a type of regulation) compared to other regulatory strategies. As any other regulatory strategy, it should be used if and only if it is the efficient way to achieve what the regulation is aiming for. Such a conceptualization thus contributes to a limiting of blind spots when the efficiency of a public service (considered as a service) is considered.
Régis Lanneau

Sectoral Self-Regulation as Viable Tool

Abstract
Traditionally, regulatory theory analyses the strengths and weaknesses of the rule-making activities by governmental bodies. But during the last twenty years self-regulation has become a viable tool in many market sectors. This contribution shows that the self-regulation model could be further developed to an intertwined co-regulation approach; the merits are shown by using the example of developing a normative framework for the distributed ledger technology infrastructure.
Rolf H. Weber

Ethical Blind Spots & Regulatory Traps: On Distorted Regulatory Incentives, Behavioral Ethics & Legal Design

Abstract
Illegal and unethical conduct often proliferates around ethical blind spots—scenarios and situations in which ordinary law-abiding people find it difficult to identify the harmfulness of their own actions. Ideally, regulators should act to diffuse ethical blind spots by trying to improve ethical awareness of potential perpetrators, in order to reduce wrongdoing. In practice, however, regulators might have a distorted incentive to conserve ethical blind spots rather than diffuse them. Regulators seek to bolster their perceived effectiveness by demonstrating intensive and rapid enforcement activity. To do so, regulators might prefer to ignore the underlying cognitive causes of unethicality, and instead constantly sanction those wrongdoers who repeatedly fall into the same trap of unintentional wrongdoing. We explore the origins of this problem in common regulatory incentive structures and in the standard design of legal norms.
Yuval Feldman, Yotam Kaplan

Law and Economics in Russian Law

Abstract
This paper studies the development of economic analysis of law in Soviet and Russian law, and a number of factors influencing this development. In Soviet law, the influence of economics on law was theoretically conceived in terms of Marxist dialectics of basis and superstructure. When Russia left the USSR in 1991, judges had to evaluate whether application of Soviet legal rules would make sense or whether there were compelling economic reasons to decide cases otherwise. The privatization and other economic reforms of Yeltsin’s Government were carried out  with the help of rather inconclusive and inefficient legislation. In the 2000s, the economic analysis of law gained momentum in Russian law: an entire branch of the judiciary (commercial or arbitration courts) supported its application. After the Higher Commercial (Arbitrazh) Court was disbanded in 2014, Russian law is becoming formalistic again; references to economic analysis of law are rare both in case law and in legal scholarship. The author explains this development in the prism of the governmental centralization policies which imply that judges shall be guided only by the sovereign (state) will, without attempting to reinterpret or cast doubts on this will from the standpoint of economic rationality or from other standpoints.
Mikhail Antonov

Specific Applications of Law and Economics of Regulation

Frontmatter

Key Lessons for the Design of Consumer Protection Legislation

Abstract
Legislation, even when well-intended, sometimes fails to provide the desired results. By design, the legislative process suffers from “noise” and is typically driven by diverse motives. Inevitably, then, the legislative process generates some mistakes. In spite of these mistakes, the legal discussion of the mechanics of the legislative process is partial and underdeveloped. Focusing on consumer protection legislation, this chapter aims to fill some of this gap. It makes two complementary arguments. Descriptively, the chapter succinctly points to some predominant weaknesses in the legislative process. It illustrates how consumer protection laws may not only fail to achieve their desired results but can also backfire and harm consumers. Normatively and prescriptively, the chapter calls for a nuanced and holistic attitude to consumer protection legislation. It argues for more cautious and tailored consumer protection legislation, which benefits from healthy skepticism. The chapter identifies four principles for improving the process of consumer law-making. First is a more careful approach to legislation, where legislatures progress in a gradual and moderate way. The second proposed principle is to approach the legislative process from a multi-disciplinary, evidence-based, empirical perspective. The third principle suggests adopting a humble decision-making process, which employs temporary consumer protection laws. Finally, the fourth principle offers diffusing and delegating some, or perhaps more, legislative and policy responsibility to administrative agencies and consumer organisations. The chapter draws on consumer protection examples from Europe, North America, Australia, New Zealand and Israel. However, it is largely general in nature. If proven successful, the proposed design principles may be scaled up and implemented in additional jurisdictions and other domains.
Shmuel I. Becher

Regulation of Information About Unfolding Events in Securities Markets: A Behavioral Economics Perspective

Abstract
In this chapter we focus on disclosure—the foundation of securities regulation—of uncertain future events. We note two major differences in the United States and European disclosure regimes: the definition of materiality of information about unfolding events and whether disclosure of material unfolding events is voluntary or mandatory. We analyze both regimes through the lens of behavioral law and economics, identifying a variety of cognitive biases influencing corporate decision makers on the disclosing side (overconfidence, overoptimism, status quo bias, and Fechner’s law) and investors on the receiving end (conservatism, the ostrich effect, availability bias, and difficulty in assessing probabilities). We find that the U.S. regime is likely to produce excessively optimistic disclosures. We also show that the European regime imposes impossible market prediction requirements on corporate insiders. Our analysis suggests that disclosure architecture in both jurisdictions would benefit from a more nuanced approach that takes into account these cognitive biases.
Ido Baum, Jaroslaw Beldowski, Dov Solomon

Data Flows versus Data Protection: Mapping Existing Reconciliation Models in Global Trade Law

Abstract
With the increased role of data in societies, the interfaces between trade and privacy protection have become multiple and intensified, and raise important questions as to adequate regulatory design that can reconcile economic and non-economic concerns, national and international interests. This chapter is set against this complex backdrop and seeks to provide a better understanding and contextualization of the theme of data protection and its interfaces with global trade law. It addresses this task by looking first at the existing international, transnational, and selected national frameworks for privacy protection and briefly sketches their evolution over time. In a second step, the chapter explores the application of the rules of the World Trade Organization, which are still in a pre-internet state, to situations where privacy concerns are affected. The chapter then looks at the data-relevant rules that have emerged in free trade agreements with a focus on the reconciliation mechanisms that these treaties provide. The chapter concludes with an appraisal of the current state of affairs and some thoughts on the pros and cons of the available legal solutions for reconciling trade and privacy protection.
Mira Burri

The Concept of Regulatory Arbitrage

Abstract
Scholars of different disciplines use the concept of regulatory arbitrage to describe situations in which economic agents structure their activities to navigate between different levels of regulation because the latter are associated with different levels of costs and benefits. At the roots, regulatory arbitrage therefore is a hybrid concept: arbitrage brings in the economic, regulation the legal perspective. Against a law and finance background, this chapter argues that realising the conceptual overlap of these two perspectives is highly productive not only for analysing regulatory arbitrage, but also to guide our thinking on how to manage and evaluate this phenomenon. So far, however, the concept of regulatory arbitrage has been more often used than analysed and conceptual analysis remains patchy. For communicating and researching this topic that is unhelpful. This chapter therefore works out a conceptual framework of regulatory arbitrage and shows how this connects and extends previous research.
Thomas Coendet

(Un)intended Consequences of Macroprudential Regulation

Abstract
The chapter examines the effects of several macroprudential tools on household choices in the mortgage market. In recent years, following the global financial crisis, central banks have imposed macroprudential policy tools on mortgage loans in order to protect the banking system from systemic risk associated with highly leveraged homeowners. Using a unique and detailed dataset on mortgage loans taken in Israel in the last decade, we empirically estimate the impact of these regulations on household choices and the housing market. In particular, we examine borrowers’ response to the following regulatory restrictions: Loan-to-Value (LTV) limits of 75% for first time buyers, 70% for home improvers, and 50% for investors; a payment-to-income (PTI) limit of 50%; a 2/3 limit on the adjustable rate component; and a 30-year maturity limit. We found that overall, the regulatory provisions tested in this project influenced the borrowers’ responses. Interestingly, two of these provisions served as an anchor to the borrowers. We obtained an increase in mortgage loans maturity following the imposed maturity limit and an increase in PTI ratio following the imposed PTI limits. We argue that these unintended consequences of the tested macroprudential regulation are a result of the anchoring and adjustment heuristic.
Moran Ofir, Yevgeny Mugerman

Precautionary Antitrust: A Precautionary Tale in European Competition Policy

Abstract
European competition policy applied to digital markets is at a turning point: new regulatory tools are under consideration and traditional antitrust analysis is altered given the new business realities embodied by tech platforms. These envisaged new solutions together with novel antitrust enforcement is justified, on one side, as the appropriate mean to overcome the error of under-enforcement of competition policy in digital markets whereas, on the other side, some criticize this new approach as erring in over-enforcement. Both claims that the other side is erring in its antitrust analysis are unsatisfactory. Each stance does not err, but rather, epitomise preferences towards regulation. This chapter argues and evidences that the new approach advocated by the European Commission for competition enforcement towards digital markets illustrates a preference for precaution. In the vein of the precautionary principle, the Commission’s perspective reveals a precautionary antitrust enforcement. It is neither a policy error nor a legal flaw—it is a regulatory preference for precaution over innovation and disruption. After having Introduced the Precautionary Principle (Sect. 1), this chapter defines Precautionary Antitrust and evidences it so that it becomes apparent that the European competition policy towards digital markets have adopted a regulatory preference leaning in favour of precaution over innovation (Sect. 2). We then conclude on our suggested explanatory framework as a guiding principle in the foreseeable trends in European and American antitrust enforcements (Sect. 3).
Aurelien Portuese

Regulation and Deregulation of Financial Markets from the Perspective of Law and Economics

Abstract
Three different models of regulation are discernible as a regulatory and evolutionary response to the potential risks related to financial innovation, namely: transaction-oriented, institution-oriented, and market-oriented model. It seems that the market-oriented model of regulation has not accidentally been adopted by many jurisdictions. Taking the unusual and diversified evolution of derivatives market into account, two lessons should possibly be remembered. Firstly, the financial crisis proved that regulation is necessary and good regulation requires a sound normative theory of both derivatives and investors’ behaviour. Additionally, it seems that the judicial regulatory capacity could still play an important, albeit limited, role among the regulatory instruments and institutional arrangements. Thus, the judicial governance remains a significant alternative to market and political processes, whereas in majority of cases the regulatory framework seems to depend primarily on the quality of regulators, especially public agencies.
Mariusz J. Golecki

Privatizing Income Security for Disabled Workers: Unintended Consequences and Labour Market Imbalances

Abstract
The need to address the overuse of public schemes for sickness benefits and disability insurance, to reduce labour distortions caused by such programs, and the desire to shift the schemes’ emphases away from mere maintenance of the benefits towards rehabilitation of the disabled, have motivated the Dutch Government to privatize income security for disabled workers. In the Netherlands, private employers are currently forced to continue to pay wages in case of worker sickness or disability for a period of 2 years. The purpose of this chapter is to consider the question whether the benefits of such policies outweigh the costs. Nowhere in Europe has the rate of growth of self-employed, temporary and flexible work relationships increased as it has in the Netherlands since the privatization movement. While it appears that the situation of many workers has improved (i.e. public disability enrolment numbers have decreased), the situation of many other workers has deteriorated (i.e. the group of employees who have no permanent employment has increased).
Ann-Sophie Vandenberghe

Regulating Innovation

Abstract
Innovation is one of the main drivers of economic growth. It is therefore no surprise that governments are increasingly trying to promote innovation through legal instruments. For this reason, the contribution analyses the interplay of law and economics in the regulation of innovation. The author examines the economic rationale behind such regulation. He assesses in which cases governments have legitimate reasons to interfere in the market economy in order to promote innovation. Furthermore, the legal possibilities and limits of influencing innovation are examined. In addition, the discussion includes the problems and economic consequences of legislators’ attempts to promote innovation. Finally, the contribution attempts to identify “best practices” for the furtherance of innovation through regulatory means.
Markus Schreiber

Matching Commitments: A New Approach to Regulation of the Commons

Abstract
No country can capture the full benefit of its efforts to provide global public goods such as protecting the climate or providing new medicines or technologies to a growing world. As a result, there is persistent under-investment in combating climate change and promoting innovation. This Article proposes a new solution to this well-studied social dilemma: matching commitments. It explains how matching commitments could be used in countries that adopt climate regulation to encourage action by other countries around the world. And it shows why this solution is better than other commonly-proposed solutions for encouraging action in recalcitrant countries.
James W. Coleman

Backmatter

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