Allocating Regulatory Resources

32 Pages Posted: 1 Aug 2013

See all articles by Amitai Aviram

Amitai Aviram

University of Illinois College of Law

Date Written: July 1, 2013

Abstract

This article analyzes how law enforcers (with particular emphasis on securities regulators) should allocate their limited resources among multiple targets, as well as how they are likely to allocate these resources. It modifies existing models in one significant way: it considers the effect of regulation not only on the behavior of those subject to it (potential wrongdoers), but also on the perceptions – and as a result, on the behavior – of those whom regulation seeks to protect (potential victims).

Normatively, the article challenges the view of regulation as a two-way tradeoff between enforcement costs and deterrence of wrongdoing (i.e., the effect of regulation on potential wrongdoers’ risk perception), because it ignores the effect of regulation on potential victims’ risk perception. The article maps a more nuanced tradeoff between regulation’s effects on three key actors: regulators (administrative effects), potential wrongdoers (accountability effects), and potential victims (placebo effects).

Descriptively, the article demonstrates how regulators’ ability to bias arbitrage (create placebo effects for private gain) generates incentives for either under- or over-enforcement, depending on the circumstances. Structural conditions that affect regulators’ incentive to use regulation for bias arbitrage are explored.

Keywords: optimal deterrence, law enforcement, regulation, resource allocation, budgeting, case selection, placebo effect, bias arbitrage

JEL Classification: D73, D78, H40, K14, K22, K23, K42

Suggested Citation

Aviram, Amitai, Allocating Regulatory Resources (July 1, 2013). Journal of Corporation Law, Vol. 37, No. 4 (2012); Illinois Program in Law, Behavior and Social Science Paper No. LBSS14-03; Illinois Public Law Research Paper No. 13-48. Available at SSRN: https://ssrn.com/abstract=2304434

Amitai Aviram (Contact Author)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

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