DP3788 Law Enforcement under Incomplete Law: Theory and Evidence from Financial Market Regulation

Author(s): Katharina Pistor, Chenggang Xu
Publication Date: February 2003
Keyword(s): financial market, incomplete law, law enforcement, regulation
JEL(s): G30, K20, K40, N20
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3788

This Paper studies the design of lawmaking and law enforcement institutions based on the premise that law is inherently incomplete. Under incomplete law, law enforcement by courts may suffer from deterrence failure. As a potential remedy, a regulatory regime is introduced. The major functional difference between courts and regulators is that courts enforce law reactively, that is only once others have initiated law enforcement procedures, while regulators enforce law proactively, i.e. on their own initiative. We study optimal regime selection between a court and a regulatory regime and present evidence from the history of financial market regulation.