Benefit-Cost Analysis for Financial Regulation

5 Pages Posted: 13 Dec 2012 Last revised: 13 Jan 2013

Eric A. Posner

University of Chicago - Law School

E. Glen Weyl

Microsoft Research; Yale University

Date Written: January 10, 2013

Abstract

Calls for benefit-cost analysis in rule-making based on the Dodd-Frank Wall Street Reform Act have revealed a paucity of work on allocative efficiency in financial markets. We propose three principles to help fill this gap. First, we highlight the need to quantify the "statistical cost of a crisis" in order to trade-off the risk of a crisis against loss of growth during good times. Second, we propose a framework quantifying the social value of price discovery and highlighting which arbitrages are over- and under-supplied from a social perspective. Finally, we distinguish between insurance benefits and gambling-facilitation harms of market completion.

Keywords: benefit-cost analysis, financial regulation, allocative efficiency, price discovery

JEL Classification: D61, G18, G28

Suggested Citation

Posner, Eric A. and Weyl, E. Glen, Benefit-Cost Analysis for Financial Regulation (January 10, 2013). American Economic Review, Vol. 103, No. 3, 2013. Available at SSRN: https://ssrn.com/abstract=2188990

Eric A. Posner

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
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773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

Eric Glen Weyl (Contact Author)

Microsoft Research ( email )

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HOME PAGE: http://www.glenweyl.com

Yale University ( email )

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United States

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