As Coase convincingly showed, transaction costs inhibit the ability of market participants to achieve first-best outcomes. This paper proposes a novel and relatively simple alternative to traditional cost-benefit analysis when regulated parties face sufficiently low transaction costs that they can bargain directly or rely on competitive markets to set efficient terms of trade. In these settings, the only informational burdens financial market regulators need bear to assess corrective rules is to identify the relevant parties, the “good” they hope to exchange, and the transaction costs that inhibit them from maximizing joint gains from trade. A rule is justified only if the regulator can show it is likely to reduce transaction costs. Facing lower transaction costs, the parties will adjust their arrangements to increase joint gains and social welfare. There is no need for the regulator to grapple with picking the appropriate discount rate or quantifying and weighing total costs and benefits. This is information the parties — the men and women “on the spot” — are best able to identify on their own.
- transaction cost,
- cost-benefit analysis,
- financial regulation
Available at: http://works.bepress.com/d_bruce_johnsen/7/