Second-Order Benefits from Standards

24 Pages Posted: 29 Mar 2007  

Frank Partnoy

University of San Diego School of Law

Abstract

This article contributes to the new governance literature by analyzing how private parties profit from standards. Scholars previously have focused on what I call first-order profits from the right to extract rent directly from the ownership or application of standards. But some parties also make second-order indirect profits by engaging in some new enterprise not directly related to the value of the relevant standard. For example, an accounting firm can offer consulting services based on its reputation as a standard bearer. Second-order profits are most substantial for strong-form standards, which arise when the government designates a private entity as standard setter and assigns it the task of enforcement and regulation. This article suggests that the question of whether such privatization is beneficial depends not only on first-order rents, but also on second-order costs and benefits. It considers two examples from the financial markets: over-the-counter derivatives and credit rating agencies.

Keywords: CDOs, credit derivatives, credit quality, banks, credit default swap, collateralized debt obligation, risks, moral hazard, disclosure, credit ratings, bankruptcy

JEL Classification: G20, G28, K20, K22, K23, L10, L13, M41, M44

Suggested Citation

Partnoy, Frank, Second-Order Benefits from Standards. Boston College Law Review, Vol. 48, p. 169, 2007; San Diego Legal Studies Paper No. 07-90. Available at SSRN: https://ssrn.com/abstract=976939

Frank Partnoy (Contact Author)

University of San Diego School of Law ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States
619-260-2352 (Phone)
619-260-4180 (Fax)

Paper statistics

Downloads
227
Rank
107,426
Abstract Views
1,232