The Independent Regulator

Abstract

This essay considers the question how should regulators be regulated. To regulate is to observe, arbitrate and equilibrate in the public interest when that interest is not well-defined. The market for regulation is incomplete; while there is a limitless demand for regulation the supply of regulation is constrained. The response to market incompleteness has been threefold; deregulation, self-regulation and whistleblowing. Whistleblowing, in particular, has conferred many insights about regulation. Whistleblowing has shown the power of the independent regulator.

Regulating conflict of interest is the unifying principle of the essay. A portfolio theory of regulation is developed where a regulator manages a portfolio of the public interest; and constrains the conflict between private interests and the public interest. The theory of regulation which emerges suggests a system of regulation with four principles: (1) Regulation of conflict of interest on a case-by-case basis; (2) Regulation by incentivizing all observers; (3) Regulation using sampling and red flags; (4) Regulatory courts.

Keywords: conflict of interest, portfolio theory, public interest, regulation, whistleblowing

JEL Classification: D72, G11, K20, L51