Simple Rules for a Complex Regulatory World: The Case of Financial Regulation

36 Pages Posted: 16 Apr 2020

See all articles by Christopher Mufarrige

Christopher Mufarrige

Wilson, Sonsini, Goodrich & Rosati

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty; PERC - Property and Environment Research Center

Date Written: April 15, 2020

Abstract

Twenty-five years ago Richard Epstein published Simple Rules for a Complex World, which would go on to become one of Epstein’s most influential works. This essay, prepared for a conference and symposium to celebrate the anniversary of the book, applies the insights of Simple Rules in the context of one of the most complex areas of social and economic regulation, financial regulation.

The complexity of modern finance is often thought to require an equally complex regulatory structure to preserve the safety of the financial system and thus Epstein’s approach is inapplicable to this context. We argue that this argument is exactly backwards. Simplicity in the regulatory framework is essential for financial institutions to manage risk and conduct their affairs efficiently and prudently. Complexity, by contrast, begets a variety of destabilizing problems, including the likelihood of regulatory arbitrage and errors by regulators that increase risk. We argue that refashioning financial regulation around Epstein’s concept of simple rules would create a more stable and efficient financial regulatory system.

Keywords: Hayek, simple rules, financial regulation

JEL Classification: B53, D18, G28, K20

Suggested Citation

Mufarrige, Christopher and Zywicki, Todd J., Simple Rules for a Complex Regulatory World: The Case of Financial Regulation (April 15, 2020). George Mason Law & Economics Research Paper No. 20-10, Available at SSRN: https://ssrn.com/abstract=3576976 or http://dx.doi.org/10.2139/ssrn.3576976

Christopher Mufarrige

Wilson, Sonsini, Goodrich & Rosati ( email )

Todd J. Zywicki (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

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