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Anti-Herding Regulation

Harvard Business Law Review, Forthcoming

Yale Law & Economics Research Paper No. 490

43 Pages Posted: 22 Feb 2014 Last revised: 11 Mar 2014

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Joshua Mitts

Columbia Law School; Columbia University - Columbia Business School

Date Written: February 20, 2014


In some contexts, an individual’s choice to mimic the behavior of others, to join the herd, can increase systemic risk and retard the production of information. Herding can thus produce negative externalities. And in such situations, individuals by definition have insufficient incentives to separate from the herd. But the traditional regulatory response to externality problems is to impose across-the-board mandates. Command-and-control regulation tends to displace one pooling equilibrium by moving behavior to a new, mandated pool. Mortgage regulators, for example, might respond to an unregulated equilibrium where most homeowners start with 2% down by imposing a requirement that causes most homeowners instead to place 10% down. But this Article shows that society can at times be better off if regulation induced separating behaviors by regulated entities. We evaluate a variety of mechanisms including licenses, subsidies and regulatory variances as well as regulatory menus and heterogeneous altering rules that can incentivize a limited number of regulated entities to take the path less chosen. Anti-herding regulation provides a new means to attend to ways that mimicry can both suppress the production of information and exacerbate systemic risk.

Keywords: regulation, law, economics, financial institutions, securities, banking

Suggested Citation

Ayres, Ian and Mitts, Joshua, Anti-Herding Regulation (February 20, 2014). Harvard Business Law Review, Forthcoming; Yale Law & Economics Research Paper No. 490. Available at SSRN:

Ian Ayres

Yale University - Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
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Joshua Mitts (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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