Research by Daegon Cho of Korea Advanced Institute of Science and Technology and Carnegie Mellon’s Pedro Ferreira and Rahul Telang finds that MNP decreased market prices across 15 EU countries by 5 percent and increased consumer welfare by more than €3 billion per year between 1999 and 2006.
Banks have also long protected customer data, not only to keep accounts secure but to have an advantage when it comes to offering loans and other bank products and services. The EU’s PSD2 law in 2015 and open-banking rules that took effect in the United Kingdom at the beginning of 2018 make those data largely available to third parties. This opens up competition and, in theory, will save those customers money.
“Procompetitive regulation seems like an oxymoron sometimes, but it’s not,” Zingales says. “We always think about regulation as a way to reduce competition in the market or as a way to address a failure in the marketplace. Sometimes rules might be useful to actually facilitate competition in the marketplace.”
Leuz suggests that transparency regulation could be an example of such procompetitive regulation. It is different from traditional regulation, he says, because it essentially uses a price mechanism. In an overview of regulation research, he recognizes that some findings suggest disclosure mandates don’t always work as intended, and yet the idea of using transparency rather than other types of mandates can produce positive results. After all, Breuer finds that making private companies report full financial statements encouraged competition. And Christensen, Maffett, Floyd, and Liu’s research on Dodd-Frank’s effect on mine safety suggests that increasing transparency, rather than using command-and-control regulations, can make for smarter regulation. “[I]nclusion of information on social responsibility in financial reports can have real effects—even if this information is already publicly available,” the researchers write.
But a key question, adds Breuer, is what kind of regulation grows the economic pie. “I think we have clear evidence that regulations can reallocate the costs and benefits,” he says. “Way less is known about whether and which regulations really affect the size of the economic pie, especially if we’re talking about information regulations.” A growing economy would make everyone better off, whereas reallocating market share produces winners and losers. More liquid, competitive markets are good—but good for everyone?
How to build better rules
Cochrane points to several failures of the current regulatory structure in the US. Chief among them is that rules aren’t well-defined, leaving companies at the mercy of regulators who may have axes to grind. In a 2015 blog post, Cochrane points to Dodd-Frank’s repeated references to “systemic” failures, although the legislation never clearly defines the term. Moreover, even a single provision, the Volcker Rule (which bans proprietary trading funded by insured deposits), is around 1,000 pages long, and so complex as to be nearly impossible to understand fully and comply with.
“The result is immense discretion, both by accident and by design. There is no way one can just read the regulations and know which activities are allowed,” Cochrane observes. “Each big bank now has dozens to hundreds of regulators permanently embedded at that bank. The regulators must give their OK on every major decision of the banks.”
Consideration for the effects such rules have on markets often gets lost in the vague and abundant language of legislation.
This is difficult to avoid. The problem with building better regulations is that there is no easy way to test their efficacy. “There are clear examples where regulation is needed, and the question is: ‘To what extent is the regulation that emerges from the political process the regulation we would like from an empirical view?’” asks Zingales.
It can be tricky for researchers to study the effects of regulations, particularly when they have to disentangle them from those of a crisis that inspired new rules. But Leuz has some ideas for how to proceed. For starters, he argues that some questions about regulations can be addressed by emulating the model used in medicine: randomized clinical trials allow drugs or procedures to be used on some patients to truly understand their efficacy. Implementing regulations more often in such or in similar ways would allow economists to see whether or not rules work and decide how to modify them to achieve desired results.
While it might not have been Congress’s intention, the mine-safety findings illustrate how such a system could work. In the case of mining, the data were publicly available, but the new rule required only some mines to include them in SEC financial-disclosure reports. That essentially produced the equivalent of a clinical trial, where some mines were subject to a new treatment and others were not. The mines required to report the data had fewer accidents and citations, likely because their investors, when safety issues were made salient, didn’t want to be on the hook for fines and payouts.
Information is also crucial. Companies have more data than ever about their customers and business. At the moment, economists don’t have access to much of these data. But Leuz argues that opening up those troves, even in limited or confidential ways, could significantly improve evidence-based regulation research.
“The biggest challenge for causal evidence and better policy-relevant estimates, however, is lack of relevant data that are sufficiently granular to identify and measure regulatory effects,” Leuz argues. “If we are serious about evidence-based policy making for financial regulation or accounting, regulators and standard setters need to actively help with generating relevant data and fostering research, essentially building economic analysis into the process of rulemaking.”
He adds that meta-analyses, which pool studies to make statistical conclusions, and a clearinghouse that summarizes the best research on topics related to regulation can help inform the decisions that have to be made by policy makers who need unbiased information.
For Leuz, evidence-based policy making holds the promise of transcending the old ideologies surrounding regulation.
“We’ve recognized that these things are a lot more complicated and that it isn’t as simple as ‘markets are good’ or ‘regulation is bad,’ or the other way around,” Leuz says. “These views still exist, but we should move beyond them and make room for theoretical and empirical research that helps us improve regulations, so that the new rules are based on or at least guided by evidence.”