On Experimentation and Real Options in Financial Regulation

32 Pages Posted: 31 Mar 2014 Last revised: 30 Oct 2014

Date Written: May 30, 2014

Abstract

In recent years, financial regulators have come under increasing judicial scrutiny for conducting inadequate cost/benefit assessments in advance of significant reforms. One facet of this scrutiny is judicial skepticism towards the proper role for regulatory experimentation (and the real option to abandon) within cost/benefit calculus. That is, regulators have arguably been discouraged from counting as a "benefit" the value of obtaining information through adopting new regulations on a trial basis, with an option to revert to the status quo at the completion of the trial. This paper studies a framework for assessing the role of "field experimentation" versus more standard forms of cost- benefit studies (or "analytic learning") within a regulatory/judicial hierarchy. We demonstrate that there is no principled basis for dismissing regulatory experimentation in cost/benefit analysis, and that such arguments deserve a place within regulators’ standard arsenals. Nevertheless, our analysis also helps explain an institutional reason for the tension between the judiciary and regulators, suggesting that regulators are plausibly too eager to embrace field experimentation, while judges are simultaneously too recalcitrant.

Keywords: Regulation, Real Options, Experimentation

JEL Classification: K00, K22, K23, D83, G38

Suggested Citation

Spitzer, Matthew L. and Talley, Eric L., On Experimentation and Real Options in Financial Regulation (May 30, 2014). Journal of Legal Studies, Forthcoming; UC Berkeley Public Law Research Paper No. 2417968; Northwestern Public Law Research Paper No. 14-20. Available at SSRN: https://ssrn.com/abstract=2417968 or http://dx.doi.org/10.2139/ssrn.2417968

Matthew L. Spitzer

Northwestern University School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-8434 (Phone)

Eric L. Talley (Contact Author)

Columbia University - School of Law ( email )

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

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

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