nep-law New Economics Papers
on Law and Economics
Issue of 2019‒10‒21
24 papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Justice without romance. The history of the economic analyses of judges behavior -1960-1993 By Alain Marciano; Alessandro Melcarne; Giovanni Ramello
  2. Rule of Law and Female Entrepreneurship By Nava Ashraf; Alexia Delfino; Edward L. Glaeser
  3. The Effect of Sentencing Reform on Crime Rates: Evidence from California's Proposition 47 By Dominguez-Rivera, Patricio; Lofstrom, Magnus; Raphael, Steven
  4. Court structure and legal efficiency, the case of French échevinage in bankruptcy courts By Stéphane Esquerré
  5. Job Loss, Credit and Crime in Colombia By Gaurav Khanna; Carlos Medina; Anant Nyshadham; Christian Posso; Jorge A. Tamayo
  6. Is Corruption a Greater Evil than Sin? By Cigdem Borke TUNALI; Laurent WEILL
  7. Dynamics of the Market for Corporate Tax-Avoidance Advice By Kai A. Konrad
  8. Marriage Equality Laws and Youth Suicidal Behaviors By D. Mark Anderson; Kyutaro Matsuzawa; Joseph J. Sabia
  9. Dynamics of Policy Adoption with State Dependence By David R. Agrawal; Gregory A. Trandel
  10. Corruption and Firms By Colonnelli, Emanuele; Prem, Mounu
  11. Bargaining Failure and Freedom to Operate: Re-evaluating the Effect of Patents on Cumulative Innovation By Gaessler, Fabian; Harhoff, Dietmar; Sorg, Stefan
  12. Electoral Sentencing Cycles By Abrams, David; Galbiati, Roberto; Henry, Emeric; Philippe, Arnaud
  13. Terrorism, Immigration and Asylum Approval By Brodeur, Abel; Wright, Taylor
  14. The Consequences to Directors of Deploying Poison Pills By Johnson, William C.; Karpoff, Jonathan M.; Wittry, Michael D.
  15. Calabresi: Heterodox Economic Analysis of Law By Alain Marciano; Giovanni Battista Ramello
  16. Transparency and Fairness in School Choice Mechanisms By Yoan Hermstrüwer
  17. The rise and persistence of illegal crops: evidence from a naive policy announcement By Mejía, Daniel; Vargas, Juan F.; Prem, Mounu
  18. Posner, Richard By Alain Marciano
  19. Compliance in Teams - Implications of Joint Decisions and Shared Consequences By Tim Lohse; Sven A. Simon
  20. When authors become inventors: an empirical analysis on patent-paper pairs in medical research By Arianna Martinelli; Elena Romito
  21. The CV effect: How far do the chances to reorganize depend on the bankruptcy judges’ profile? By Régis BLAZY; Stéphane ESQUERRE
  22. An Introduction to Juergen Backhaus’s “Lawyers’ economics vs. economic analysis of law” By Alain Marciano
  23. The Persistence of Weapons: Global Evidence By Simplice A. Asongu; Joseph I. Uduji; Elda N. Okolo-Obasi
  24. It's the tail-risk, stupid! Precluding regulatory arbitrage in shadow banking with a normatively charged approach to supervision capitalizing on multipolar regulatory dialogues By Thiemann, Matthias; Tröger, Tobias

  1. By: Alain Marciano (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier); Alessandro Melcarne (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Giovanni Ramello (Dipartimento di scienze giuridiche ed economiche, Universita degli studi del piemonte orientale - Universita degli studi del piemonte orienta)
    Abstract: Richard Posner's "What Do Judges and Justices Maximize?" (1993a) is not, as usually believed, the first analysis of judges' behaviors made by using the assumption that judges are rational and maximize a utility function. It arrived at the end of a rather long process. This paper recounts the history of this process, from the "birth" of law and economics in the 1960s to 1993. We show that economic analyses of judge behavior were introduced in the early 1970s under the pen of Posner. At that time, rationality was not modeled in terms of utility maximization. Utility maximization came later. We also show that rationality and incentives were introduced to explain the efficiency of Common Law. Around this theme, a controversy took place that led Posner, and other economists, to postpone their analysis of judicial behavior until the 1990s. By then, the situation had changed. New and conclusive evidence of judges' utility maximizing behavior demanded for a general theory to be expressed. In addition, the context was favorable to Chicago economists. It was time for Posner to publish his article.
    Keywords: Self-interest,Utility Maximization,Judges,Judicial decision making,Rationality
    Date: 2019–08
  2. By: Nava Ashraf; Alexia Delfino; Edward L. Glaeser
    Abstract: Commerce requires trust, but trust is difficult when one group consistently fears expropriation by another. If men have a comparative advantage at violence and there is little rule-of-law, then unequal bargaining power can lead women to segregate into low-return industries and avoid entrepreneurship altogether. In this paper, we present a model of female entrepreneurship and rule of law that predicts that women will only start businesses when they have both formal legal protection and informal bargaining power. The model's predictions are supported both in cross-national data and with a new census of Zambian manufacturers. In Zambia, female entrepreneurs collaborate less, learn less from fellow entrepreneurs, earn less and segregate into industries with more women, but gender differences are ameliorated when women have access to adjudicating institutions, such as Lusaka's “Market Chiefs” who are empowered to adjudicate small commercial disputes. We experimentally induce variation in local institutional quality in an adapted trust game, and find that this also reduces the gender gap in trust and economic activity.
    JEL: J16 K40 O15 R12
    Date: 2019–10
  3. By: Dominguez-Rivera, Patricio (Inter-American Development Bank); Lofstrom, Magnus (Public Policy Institute of California); Raphael, Steven (University of California, Berkeley)
    Abstract: We evaluate whether California's state proposition 47 impacted state violent and property crime rates. Passed by the voters in November 2014, the proposition redefined many less serious property and drug offenses that in the past could be charged as either a felony or misdemeanor to straight misdemeanors. The proposition caused a sudden and sizable decline in county jail populations, a moderate decline in the state prison population, a decrease in arrests for property and drug offenses, and a wave of legal petitions filed for retroactive resentencing and reclassification of prior convictions. We make use of multiple strategies to estimate the effect of the proposition, including state-level synthetic cohort analysis, within-state event study estimates based on state-level monthly time series, and a cross-county analysis of changes in county-level crime rates that exploit heterogeneity in the effects of the proposition on local criminal justice practices. We find little evidence of an impact on violent crime rates in the state. Once changes in offense definitions and reporting practices in key agencies are accounted for, violent crime in California is roughly at pre-proposition levels and generally lower than the levels that existed in 2010 prior to a wave major reforms to the state's criminal justice system. While our analysis of violent crime rates yields a few significant point estimates (a decrease in murder for one method and an increase in robbery for another), these findings are highly sensitivity to the method used to generate a counterfactual comparison path. We find more consistent evidence of an impact on property crime, operating primarily through an effect on larceny theft. The estimates are sensitive to the method used to generate the counterfactual, with more than half of the relative increase in property crime (and for some estimates considerably more) driven by a decline in the counterfactual crime rate rather than increases for California for several of the estimators that we employ. Despite this sensitivity, there is evidence from all methods tried that property crime increased with, a ballpark summary of five to seven percent roughly consistent with the totality of our analysis. Similar to violent crime, California property crime rates remain at historically low levels.
    Keywords: incarceration, sentencing, crime, jail, prison, Proposition 47
    JEL: K40 K42 H11
    Date: 2019–09
  4. By: Stéphane Esquerré (LARGE - Laboratoire de recherche en gestion et économie - UNISTRA - Université de Strasbourg - L'europe en mutation : histoire, droit, économie et identités culturelles - CNRS - Centre National de la Recherche Scientifique - UNISTRA - Université de Strasbourg)
    Abstract: This paper investigates how the Court's organisation affect judgments. We use a historical accident to derive this impact. Indeed, though the same bankruptcy laws apply on the whole territory, courts in the eastern part of France (in Alsace-Moselle) consist on a mix of professional and non-professional judges, while other French Courts are only composed of lay judges. Using an original dataset of firms with monthly bankruptcy ratings, we analyse the decision to file for bankruptcy. To do so we restrict our sample to firms inside and outside but close to Alsace-Moselle. We study their survival after their rating has dropped between two months. We find mixed Courts in Alsace-Moselle have lower rates of bankruptcy which should be explained by a lower reorganisation rate. We could think that mixed courts are less efficient ex-ante compared to lay courts. Yet both have overall similar level of liquidation rate. Thus, both systems provide similar ex-post efficiency while behaving differently.
    Date: 2019–10–04
  5. By: Gaurav Khanna; Carlos Medina; Anant Nyshadham; Christian Posso; Jorge A. Tamayo
    Abstract: We investigate the effects of job displacement, as a result of mass-layoffs, on criminal arrests using a novel matched employer-employee-crime dataset in Medellín, Colombia. Job displacement leads to immediate earnings losses, and an increased likelihood of being arrested for both the displaced worker and for other youth in the family. We leverage variation in opportunities for legitimate reemployment and access to consumption credit to investigate the mechanisms underlying this job loss-crime relationship. Workers in booming sectors with more opportunities for legitimate reemployment exhibit smaller increases in arrests after job losses. Greater exposure to expansions in consumption credit also lowers the job loss-crime elasticity.
    JEL: J63 J65 K42
    Date: 2019–09
  6. By: Cigdem Borke TUNALI (Istanbul University); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: The aim of this paper is to provide new evidence on the relation between religion and attitude toward corruption at the individual level. We use World Values Survey data covering 59 countries during the period 2010-2014 to examine if religiosity and religious denominations are associated with attitude toward corruption. We find that religious people are more averse to corruption, supporting the view that religiosity favors honest behavior. Attitudes toward corruption differ across religious denominations. Protestantism and Hinduism are associated with greater aversion to corruption than Atheism, while other religious denominations do not have clear difference. This conclusion accords with the view that hierarchical religions favor greater tolerance to corruption than individualistic religions. Additional estimations on groups of countries with different dominant religions and on multi-religious countries show however that the relation between religious denomination and tolerance to corruption can vary with the religious environment of the country.
    Keywords: religion, corruption.
    JEL: H11 K42 Z12
    Date: 2019
  7. By: Kai A. Konrad
    Abstract: This paper addresses the current debate about mandatory disclosure rules for aggressive tax-planning models as a means to shorten regulatory delay. It focuses on the dynamic interaction of innovation and imitation of aggressive tax-planning products and governmental tax regulation and highlights the importance of the length of regulatory lag in comparison to the time it takes the tax-consulting industry to imitate newly innovated tax-avoidance products. It reveals synergies between highly innovative tax-consulting firms and the governmental tax legislator/regulator. It suggests that innovative tax-consulting firms may benefit from governmental regulation and may actively try to inform and influence the regulator to shorten but not eliminate the regulatory delay.
    Keywords: corporate taxation, tax planning, mandatory disclosure rules, tax consultants, innovation, imitation, tax avoidance, anti-tax-avoidance regulation
    JEL: H26 M48
    Date: 2018–05
  8. By: D. Mark Anderson; Kyutaro Matsuzawa; Joseph J. Sabia
    Abstract: Since the landmark ruling in Goodridge v. Department of Public Health in 2004, the legalization of same-sex marriage (SSM) has proliferated throughout the United States via either legislative action or court order. Advocates of SSM laws argue that marriage equality will generate important health benefits not only for adult same-sex couples, but also for LGBQ-identifying youths. Using data from the State Youth Risk Behavior Surveys, we explore the relationship between marriage equality and suicidal behaviors among LGBQ-identifying youths. Despite previous research suggesting otherwise, we find little evidence that SSM laws have reduced suicide attempts among teen sexual minorities, nor have they decreased the likelihood of suicide planning, suicide ideation, or depression. Instead, we find some evidence that SSM legalization via judicial mandate is associated with worse mental health for these individuals, consistent with a story of social backlash.
    JEL: I1 I12 J12
    Date: 2019–10
  9. By: David R. Agrawal; Gregory A. Trandel
    Abstract: We study the dynamics of policy diffusion when a first-moving jurisdiction that legalizes an activity reduces the probability of legalization in nearby later-acting jurisdictions. If a jurisdiction’s firms can sell to neighboring residents, but if the good is competitively sold at every location, then policies converge: all jurisdictions legalize or all jurisdictions ban. If firms have some market power, and if the location of firms depends on the order of legalization, an early-adopting government may legalize, but an otherwise identical, but later-acting, neighboring government might not. This possible asymmetry is due to state dependence resulting from the initial distribution of firms following the first-mover’s legalization. Empirically, counties that legalize the sale of fireworks first have more firework vendors just inside their border than counties that legalize later. Furthermore, counties have a longer duration to legalize fireworks if nearby counties have already adopted. State dependence resulting from a first-mover advantage contributes to the policy divergence of regulatory policies.
    Keywords: dynamics, fiscal competition, state dependence, externalities, borders
    JEL: H70 K20 L50 R30 R50
    Date: 2019
  10. By: Colonnelli, Emanuele; Prem, Mounu
    Abstract: We estimate the causal real economic effects of a randomized anticorruption crackdown on local governments in Brazil over the period 2003-2014. After anti-corruption audits, municipalities experience an increase in economic activity concentrated in sectors most dependent on government relationships. These effects spill over to nearby municipalities and are larger when the audits are covered by the media. Back-of-the-envelope estimates suggest that $1 away from corruption generates more than $3 in local value added. Using administrative matched employer-employee and firm-level datasets and novel face-to-face firm surveys we argue that corruption mostly acts as a barrier to entry, and by introducing costs and distortions on local government-dependent firms. The political misallocation of resources across firms plays a seemingly secondary role, indicating that at the local level most rents are captured by politicians and public officials rather than firms.
    Keywords: Corruption; Firms; Audits; Public Procurement; Misallocation; Labor Reallocation; Political Connections
    JEL: D73 H83 D22
    Date: 2019–10
  11. By: Gaessler, Fabian; Harhoff, Dietmar; Sorg, Stefan
    Abstract: We investigate the causal effect of patent rights on cumulative innovation, using large-scale data that approximate the patent universe in its technological and economic variety. We introduce a novel instrumental variable for patent invalidation that exploits personnel scarcity in post-grant opposition at the European Patent Ofï¬ ce. We ï¬ nd that patent invalidation leads to a highly signiï¬ cant and sizeable increase of follow-on inventions. The effect is driven by cases where the removal of the individual exclusion right creates substantial freedom to operate for third parties. Importantly, our results suggest that bargaining failure between original and follow-on innovators is not limited to environments commonly associated with high transaction costs.
    Keywords: bargaining failure; Cumulative innovation; freedom to operate; opposition; patents
    JEL: K41 L24 O31 O32 O33 O34
    Date: 2019–08
  12. By: Abrams, David; Galbiati, Roberto; Henry, Emeric; Philippe, Arnaud
    Abstract: Exploiting features of the North-Carolina judicial system, elections and forced rotation of judges, we overcome major challenges hampering the identifi cation of the existence and source of sentencing variation over the electoral cycle. We show that when elections approach, sentencing for felonies increase. This increase is driven by decisions taken by judges present in their district of election, and only when elections are contested. When judges operate outside their district of elections, sentencing decisions do not signi ficantly vary over the electoral cycle. Our results demonstrate the existence of strategic sentencing by judges in an attempt to please voters and allow us to discard alternative explanations for the rise along the cycle, such as behavioral motives or contextual explanations.
    JEL: K42
    Date: 2019–10
  13. By: Brodeur, Abel (University of Ottawa); Wright, Taylor (University of Ottawa)
    Abstract: Using the universe of individual asylum cases in the United States from 2000-2004 and a difference-in-differences research design, we test whether Sept. 11, 2001 decreased the likelihood that applicants from Muslim-majority countries were granted asylum. Our estimates suggest that the attacks resulted in a 4 percentage points decrease in the likelihood that applicants from Muslim-majority countries are granted asylum. The estimated effect is larger for applicants who share a country of origin with the Sept. 11, 2001 attackers. These effects do not differ across judge political affiliation. Our findings provide evidence that emotions affect the decisions of judges.
    Keywords: courts, crime, immigration, judicial decision, sentencing and terrorism
    JEL: D74 K4 P48
    Date: 2019–09
  14. By: Johnson, William C. (Suffolk University - Sawyer School of Management; Vienna University of Economics and Business); Karpoff, Jonathan M. (University of Washington - Michael G. Foster School of Business); Wittry, Michael D. (Ohio State University (OSU) - Department of Finance)
    Abstract: We examine the labor market consequences for directors who adopt poison pills. Directors who become associated with pill adoption experience significant decreases in vote margins and increases in termination rates across all their directorships. They also experience a decrease in the likelihood of new board appointments. Firms have positive abnormal stock price reactions when pill-associated directors die or depart their boards, compared to zero abnormal returns for other directors. Further tests indicate that these adverse consequences accrue primarily to directors involved in the adoption of pills at seasoned firms and not at young firms. We conclude that directors who become associated with poison pill adoption suffer a decrease in the value of their services, and that the director labor market thus plays an important role in firms’ governance.
    JEL: G34 K22 L51
    Date: 2019–08
  15. By: Alain Marciano (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier); Giovanni Battista Ramello (Università degli Studi del Piemonte Orientale-Amedeo Avogadro (ITALY))
    Abstract: Guido Calabresi is one of the founders of the law and economics movement. His approach, however, corresponds to a form of economic analysis of law that, we claim, is heterodox. We show why in this short notice.
    Date: 2018–08–13
  16. By: Yoan Hermstrüwer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This article explores the impact of procedural information on the behavior of applicants under two of the most commonly used school admissions procedures: the Gale-Shapley mechanism and the Boston mechanism. In a lab experiment, I compare the impact of information about the mechanism, information about individually optimal application strategies, and information about both. I find that strategic and full information increase truth-telling and stability under the Gale-Shapley mechanism. Under the Boston mechanism, however, the adoption of equilibrium strategies remains unaffected. Contrary to prevailing assumptions in matching theory, I show that the Boston mechanism improves perceived fairness. These results underscore the importance of procedural information and suggest that eliminating justified envy may not be a sucient condition of fairness.
    Keywords: matching markets, school choice, transparency, fairness, law and market design
    JEL: C78 C92 I20 K10
    Date: 2019–08
  17. By: Mejía, Daniel; Vargas, Juan F.; Prem, Mounu
    Abstract: Well-intended policies often have negative unintended consequences if they fail to foresee the different ways in which individuals may respond to the new set of incentives. When widespread and persistent, these may lead to a net reduction of social welfare. Focusing on the case of anti-drug policies, in this paper we show that the recent unprecedented surge in the growing of illicit coca crops in Colombia was the result of a naive and untimely policy announcement during peace negotiations between the government and the FARC guerrillas. On May 2014, the parties’ peace delegations issued a press release announcing that coca-growing farmers would receive material incentives for voluntary crop substitution once a final agreement had been reached. To evaluate the anticipation effect of this announcement we exploit the cross sectional variation on both the cost advantage of growing coca (using an ecological measure of coca suitability) and the expected benefits of doing so (using a predicted measure of where the material benefits would have been targeted). Coca plantations levels remained high even after the implementation of the announced incentives’ scheme. We explain this persistence by documenting that the surge in coca growing is differentially higher in areas with presence illegal armed groups, that benefited financially from availability of a key input in the drug trade.
    Keywords: Coca growing; Drug war; Anticipation effects; Policy announcement; Colombia
    JEL: K42 D78
    Date: 2019–10
  18. By: Alain Marciano (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)
    Abstract: Posner is one of the main contributors to what is known as "economic analysis of law". In this entry, we restrict our presentation to a few controversial claims he made (efficiency, wealth-maximization, Hicks-Kaldor, judicial decision making).
    Date: 2018
  19. By: Tim Lohse; Sven A. Simon
    Abstract: In today's business environment, team work is omnipresent. But might teams be more prone toward non-compliance with laws and regulations than single individuals despite imminent negative consequences of uncovering misconduct? The recent prevalence of corporate delinquencies gives rise to this concern. In our laboratory experiment, we investigate the determinants of teams' compliance behavior. In particular, we disentangle the e¤ect of deciding jointly as a team of two from sharing the economic consequences among both team members. Our findings provide evidence that teams are substantially less compliant than individuals are. This drop in compliance is driven by the joint, rather than the individual, liability of team members. In contrast, whether subjects make their decisions alone or together does not influence the overall compliance rate. When coordinating their compliance decision teams predominately discuss the risk of getting caught in an audit, and team decision-making is characterized by behavioral spillovers between team members. Holding each team member fully liable is a promising means to deter them from going astray.
    Keywords: Compliance, lying, team decision, shared liability, audit, communication, laboratory experiment
    JEL: C92 D91 K42
    Date: 2018–05
  20. By: Arianna Martinelli; Elena Romito
    Abstract: This paper investigates the effect of patenting on follow-on knowledge in cancer research. Using a difference-in-difference approach on an original dataset of patent-paper-pairs we are able to estimate the causal effect of the granting of a patent on scientic development in the same domain. Furthermore, we disentangle between private companies and universities in order to assess whether patenting impacts differently on the two groups. In addition, we study to which extend the degree of applicability of an innovation is further affects the relation. To address these issues we build a novel dataset matching patent data (retrieved from USPTO) and publication data (retrieved from Thompson-Web of Science). Results show that patenting reduces the rate of citations of the paired publication indicating a decrease of related scientic activity only in case the citing agent belongs to a public institution. In addition, the the more invention is applied, the weaker is the negative effect. This paper makes a contribution to the debate on IPR and economics of science.
    Keywords: IPRs; Patent; Scientific publications; Applicability.
    Date: 2019–10–15
  21. By: Régis BLAZY (LaRGE Research Center, Université de Strasbourg); Stéphane ESQUERRE (Ministère de la Justice, France)
    Abstract: This paper explores the linkage between the individual profiles of Parisian commercial judges with bankruptcy affairs they supervised between 2006-2012. We show that a “CV effect” prevails: the firms’ actual chances to reorganize after bankruptcy filing vary with the composition of the chambers. We also confirm the existence of a limited (but not marginal) appointment bias suggesting that the bankruptcy affairs are not fully randomized across judges. Several variables accounting for the judges’ profiles exert a significant influence on reorganization. First, the presence of female judges increases the chances of a successful plan. We find a similar influence of the judges’ managerial skills and of the highest academic profiles. Yet, a mismatch between the judges’ profiles (mostly oriented towards big businesses) and the firms (closer to SMEs) undermines the probability to reorganize. We also refined our analysis by focusing on the two main filters for reorganization: i) the decision to open an observation period, ii) the supervision of such period by juges commissaires. Overall, our approach provides useful elements of answer on how to reduce type 2 errors during the bankruptcy process. Our findings lead to normative recommendations in order to better align consular Justice with the litigants’ needs. The results on France can extend to other mixed consular systems.
    Keywords: Bankruptcy, Reorgnization, Consular Justice, Commercial Court, Judges, CV
    JEL: G33 K22
    Date: 2019
  22. By: Alain Marciano (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)
    Date: 2018
  23. By: Simplice A. Asongu (Yaoundé/Cameroon); Joseph I. Uduji (University of Nigeria, Nsukka, Nigeria); Elda N. Okolo-Obasi (University of Nigeria, Nsukka, Nigeria)
    Abstract: This study investigates persistence (or hysteresis) in weapons using a panel of 163 countries for the period 2010 to 2015. The following are some main findings. (i) Compared to countries that are landlocked, persistence in heavy weapons is more apparent in nations that are open to the sea. (ii) Relative to the Middle East & North Africa (MENA), heavy weapons is more persistent in the East Asia and the Pacific countries. This tendency is consistent with “weapons imports†. (vi) Evidence of persistence is not very apparent in “weapons imports†with the exception of the fact that it is higher in low income countries, compared to their high income counterparts. Hence, there is less hysteresis in weapons exports when compared with heavy weapons when weapons exports. (v) The determinants of persistence employed in the conditioning information set are contingent on fundamental characteristics and panels. Policy implications are discussed.
    Keywords: War; Armaments; Global evidence; Persistence
    JEL: H56 L64 K42 P50
    Date: 2019–01
  24. By: Thiemann, Matthias; Tröger, Tobias
    Abstract: The use of contractual engineering to create channels of credit intermediation outside of the realm of banking regulation has been a recurring activity in Western financial systems over the last 50 years. After the financial crisis of 2007 and 2008, this phenomenon, at that time commonly referred to as 'shadow banking', evoked a large-scale regulatory backlash, including several specific regulatory constraints being placed on non-bank financial institutions (NBFI). This paper proposes a different avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation. Rather than engaging in the proverbial race between hare and hedgehog that is emerging with increasingly specific regulation of particular contractual arrangements, this paper argues for a normative approach to supervision. We outline this approach in detail by showing that regulators should primarily analyse the allocation of tail risk inherent in the respective contractual arrangements. Our paper proposes to assign regulatory burdens equivalent to prudential banking regulation, in case these arrangements become only viable through indirect or direct access to an (ad hoc) public backstop. In order to make the pivotal assessment, regulators will need information about recent contractual innovations and their risk-allocating characteristics. According to the scholarship on regulatory networks serving as communities of interpretation, we suggest in particular how regulators should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the real-world implications of evolving transactional structures. This paper then uses the rise of credit funds as a non-bank entities economically engaged in credit intermediation to apply this normative framework, pointing to recent contractual innovations that call for more regulatory scrutiny in a multipolar regulatory dialogue.
    Keywords: shadow banking,regulatory arbitrage,principles-based regulation,credit funds,prudential supervision,non-bank financial intermediation
    JEL: G21 G28 H77 K22 K23 L22
    Date: 2019

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