Law Enforcement Under Incomplete Law: Theory and Evidence from Financial Market Regulation

48 Pages Posted: 16 Jul 2008

See all articles by Katharina Pistor

Katharina Pistor

Columbia University School of Law

Chenggang Xu

University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: December 2002

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, defined as the social-welfare loss that results from the regime's inability to deter harmful actions. 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. Proactive law enforcement may be superior in preventing harm. However, it incurs high costs and may err in stopping potentially beneficial activities. We study optimal regime selection between a court and a regulatory regime and present evidence from the history of financial market regulation.

JEL Classification: D20, D80, H11, H70, L22, P11

Suggested Citation

Pistor, Katharina and Xu, Chenggang, Law Enforcement Under Incomplete Law: Theory and Evidence from Financial Market Regulation (December 2002). LSE STICERD Research Paper No. TE442. Available at SSRN: https://ssrn.com/abstract=1160987

Katharina Pistor (Contact Author)

Columbia University School of Law ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-0068 (Phone)
212-854-7946 (Fax)

Chenggang Xu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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