11/06/2015

Risk Regulation and Strategy

The classical view on regulation treats it as a set of incentive contracts within a principalagent relationship, where the regulator is the principal, and the agent is the regulated firm. Hence, regulation involves creating incentive-compatible contracts, so that any market failures are corrected, and that regulated firms have an incentive to behave in a way that is consistent with systemic stability and investor protection. Against this theoretical background, it has been often argued that the global financial crisis of 2007-2008, is first and foremost a crisis of the prevailing self-regulation and laissez-faire doctrine, especially in the United States and in the United Kingdom.

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