Benefit-Cost Analysis for Financial Regulation

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

See all articles by Eric A. Posner

Eric A. Posner

University of Chicago - Law School

E. Glen Weyl

Microsoft Research; RadicalxChange Foundation

Date Written: January 10, 2013


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, Eric Glen, Benefit-Cost Analysis for Financial Regulation (January 10, 2013). American Economic Review, Vol. 103, No. 3, 2013, Available at SSRN:

Eric A. Posner

University of Chicago - Law School ( email )

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Eric Glen Weyl (Contact Author)

Microsoft Research ( email )

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RadicalxChange Foundation ( email )


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