Yale University - Yale Law School; Yale University - Yale School of Management
Columbia Law School; Columbia University - Columbia Business School
February 20, 2014
Harvard Business Law Review, Forthcoming
Yale Law & Economics Research Paper No. 490
In some contexts, an individual’s choice to mimic the behavior of others, to join the herd, can increase systemic risk and retard the production of information. Herding can thus produce negative externalities. And in such situations, individuals by definition have insufficient incentives to separate from the herd. But the traditional regulatory response to externality problems is to impose across-the-board mandates. Command-and-control regulation tends to displace one pooling equilibrium by moving behavior to a new, mandated pool. Mortgage regulators, for example, might respond to an unregulated equilibrium where most homeowners start with 2% down by imposing a requirement that causes most homeowners instead to place 10% down. But this Article shows that society can at times be better off if regulation induced separating behaviors by regulated entities. We evaluate a variety of mechanisms including licenses, subsidies and regulatory variances as well as regulatory menus and heterogeneous altering rules that can incentivize a limited number of regulated entities to take the path less chosen. Anti-herding regulation provides a new means to attend to ways that mimicry can both suppress the production of information and exacerbate systemic risk.
Number of Pages in PDF File: 43
Keywords: regulation, law, economics, financial institutions, securities, banking
Date posted: February 22, 2014 ; Last revised: March 11, 2014
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