Dodd-Frank Is a Pigouvian Regulation

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Citation: Aaron Levine, Joshua Macey (2018/02/15) Dodd-Frank Is a Pigouvian Regulation. Yale Law Journal (RSS)
Internet Archive Scholar (search for fulltext): Dodd-Frank Is a Pigouvian Regulation
Download: https://ssrn.com/abstract=3148270
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Summary

Argue that Dodd-Frank compliance costs function as "Pigouvian regulation": like a Pigouvian tax, they cause individual actors to bear costs of externalities they generate. Analyzes spinoffs and divestitures from 11 systemically important financial institutions (SIFIs) since Dodd-Frank went into effect in 2010 through 2016 and documents the extent to which the Act’s compliance costs have led SIFIs to shed business lines of their own accord in order to reduce the costs of complying with the Act by

  • divesting commodities holdings
  • shedding SIFI businesses by nonbank firms
  • reducing systemic risks by remaining SIFIs

Argue for the benefits of Pigouvian regulation, with respect to command-and-control regulation and Pigouvian taxation:

  • flexibility ("right sizing") by regulators
  • informational advantages to both firms and regulators
  • allocation of responsibility
  • political feasibility


Downsides:

  • regulatory arbitrage
  • black swan events (might fail to help if systemic risk is triggered)
  • structural limitations

Theoretical and Practical Relevance

Blog post by authors https://corpgov.law.harvard.edu/2018/04/13/dodd-frank-is-a-pigouvian-regulation/

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