On the Systemic Importance of Digital Platforms

Abstract

At the dawn of the Great Recession, the bankruptcy of Lehman Brothers shook the economy to its core. With other Wall Street institutions on the brink of insolvency, the financial system slid towards a free fall. Governments around the world responded with more than $11 trillion in emergency bailouts. Financial institutions deemed too-big-to-fail were rescued in the hopes of escaping an economic abyss. In the aftermath of the collapse, Congress acted to address dangerous risks and externalities in the financial sector. With the enactment of the Dodd-Frank Act, Congress codified the logic of “systemic importance” in financial regulation. In essence, if an institution is consequential enough to pose systemic risks to the entire economy, that institution should receive heightened regulatory scrutiny.

A distinct but parallel set of questions now exists about certain digital platforms. A small number of companies—some governed by dual-class share structures—have immense power over social behavior, human health, and the information ecosystem. Yet, despite the enormous externalities generated by their business models, digital platforms remain virtually unregulated. Our paper addresses two primary questions: First, have some digital platforms attained systemically important status? And, if so, does their systemic importance warrant enhanced regulatory oversight? In addressing those questions, we consider parallels with financial regulation, drawing lessons from the framework for systemically important financial institutions (SIFIs) in the Dodd-Frank era.

Keywords: digital platforms; systemic risk; systemic importance; social media