Part One CAI Mengqi 5/30/2014 ENFORCEMENT. Page 2 Enforcement Investor protection requires both law and the effective enforcement of law. Academic.

Part One

CAI Mengqi

5/30/2014

ENFORCEMENT

Page 2

Enforcement

Investor protection requires both law and the effective enforcement of law.

Academic research underscores the importance of enforcement.

Page 3

Division of Public Enforcement and Private Enforcement

Public enforcement is usually defined by a system in which the law enforcers will investigate violations and prosecute violators as government employees.

Under private enforcement, private individuals and firms would investigate violations, apprehend violators, and conduct legal proceedings to redress violations.

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Relative Value of Public Enforcement and Private Enforcement

Becker and Stigler

Landes and Posner

LLS

Howell E.Jackson and Mark J.Roe

Reference:

Becker, G. S., & Stigler, G. J. (1974). Law enforcement, malfeasance, and compensation of enforces.

Landes, W. M., & Posner, R. (1974). The private enforcement of law.

Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What works in securities laws?.

Jackson, H. E., & Roe, M. J. (2009). Public and private enforcement of securities laws: Resource-based evidence.

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Relative Value of Public Enforcement and Private Enforcement

Becker and Stigler

In the public enforcement, the enforcer is rewarded by a fixed, flat wage.

The essence of private enforcement is compensation of enforcers on performance, or by a piece-rate or a bounty, instead of by a straight salary.

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Relative Value of Public Enforcement and Private Enforcement

Becker and Stigler

A private enforcement system is to be preferred because it

(a) reduces the cost of monitoring public enforcers;

(b) avoids the need to pay them high wages;

(c) removes the risk of malfeasance.

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Relative Value of Public Enforcement and Private Enforcement

Landes and Posner

Optimal public enforcement is defined as a social planner's unconstrained social-welfare-maximizing problem through the optimal choice of fines and the probability of apprehension and conviction.

Private enforcement regime will result in overinvestment in law enforcement.

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Relative Value of Public Enforcement and Private Enforcement

LLS

Highlight the significance of private enforcement

We examine the effect of securities laws on stock market development in 49 countries. We find almost no evidence that public enforcement benefits stock markets, and strong evidence that laws facilitating private enforcement through disclosure and liability rules benefit stock markets.

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Relative Value of Public Enforcement and Private Enforcement

Howell E. Jackson and Mark J. Roe In principle, both enforcement mechanisms could have serious defects

and strong advantages.

Howell E. Jackson and Mark J. Roe constructed two categories of resource-based public enforcement intensity. Resources are measured by staffing levels (per million of population) and budgets (per billion US$ of GDP).

Public enforcement correlated significantly with key financial outcomes, such as stock market capitalization, trading volumes, the number of domestic firms and IPOs.

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Relative Value of Public Enforcement and Private Enforcement

Howell E. Jackson and Mark J. Roe

Public enforcement is no less valuable for financial market outcomes than private enforcement such as disclosure.

Liability-based private enforcement is perhaps less important, given the weak results for private enforcement's liability measure.

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Conclusion

Becker and Stigler's recommendation of privatization is far from being adopted.

Landes and Posner tell us why private enforcement might not work well as compared to public enforcement. But the public enforcement outcome in this theory is the first best, which might not be implementable in practice.

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Conclusion

Pros Cons

Public Enforcement public-regarding

policymakers

sharp penalties

weak incentives

poor information

Private Enforcement well-informed actors

well-aligned incentives

collective action dilemma

free rider tendency

difficulty in getting full compensation

Prior Indeterminacy

Empirical Study

LLS concluded that public enforcement is of limited value,while Howell E. Jackson & Mark J. Roe concluded otherwise.

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Conclusion

Private enforcement is often more effective than public enforcement, but the two forms of enforcement complement each other.

Public enforcement is no worse than disclosure-based private enforcement, and much better than liability-based private enforcement.

Government may choose public enforcement even though private enforcement is socially desirable, because the government loses control over enforcement intensity when law enforcement is privatized.