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Self-regulation versus government regulation: an externality view

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  • Chang Ma

    (Fudan University (FISF))

Abstract

Who should be responsible for industry regulation, a private self-regulatory agency or a public agency? This paper provides a simple framework to analyze the optimal scope of a private self-regulatory organization (SRO) versus government regulation. The trade-off depends on three key elements: externalities, monopoly distortions, and the degree of asymmetric information. Self-regulation is more desirable than government regulation if the degree of asymmetric information between the public regulator and private industry is larger than the size of the monopoly distortion and externalities from the industry to society. An optimal mechanism consists of both self-regulation and government regulation where an SRO internalizes externalities within the industry and the government corrects any distortions generated by the SRO. These insights can be applied to many practical settings and policy discussions—for example, in the context of the financial sector, as with the Financial Industry Regulatory Authority.

Suggested Citation

  • Chang Ma, 2020. "Self-regulation versus government regulation: an externality view," Journal of Regulatory Economics, Springer, vol. 58(2), pages 166-183, December.
    • Handle: RePEc:kap:regeco:v:58:y:2020:i:2:d:10.1007_s11149-020-09415-y
    DOI: 10.1007/s11149-020-09415-y
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    Cited by:

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    More about this item

    Keywords

    Self-regulation; Government regulation; Externalities;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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