American Economic Review: Vol. 103 No. 3 (May 2013)


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Benefit-Cost Analysis for Financial Regulation

Article Citation

Posner, Eric, and E. Glen Weyl. 2013. "Benefit-Cost Analysis for Financial Regulation." American Economic Review, 103(3): 393-97.

DOI: 10.1257/aer.103.3.393


Calls for benefit-cost analysis in rule-making, based on the Dodd-Frank Wall Street Reform Act, have revealed a paucity of work on allocative efficiency in financial markets. We propose three principles to help fill this gap. First, we highlight the need for quantifying the statistical cost of a crisis to trade off the risk of a crisis against loss of growth during good times. Second, we propose a framework quantifying the social value of price discovery, and highlighting which arbitrages are over- and under-supplied from a social perspective. Finally, we distinguish between insurance benefits and gambling-facilitation harms of market completion.

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Posner, Eric (U Chicago)
Weyl, E. Glen (U Chicago)

JEL Classifications

D61: Allocative Efficiency; Cost-Benefit Analysis
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation
L51: Economics of Regulation

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