Ogus Encyclopedia entry on Self regulation

 
1. The nature of self regulation
a. Self regulation - law formulated by private agencies to govern professional and trading
activities// acting according to one's own volition and not as a response to an external
constraint
i. Not used in the literal sense but rather connotes some degree of collective
constraint, other than directly emanating from government, to engender outcomes
which would not be reached by individual market behavior alone
2. Spontaneous private legal ordering
a. Economic explanation - basis is reciprocity. Individuals recognize the benefits they will
derive from behaving in accordance with others' expectations
i. While originally disputes may be resolved by force, individuals will normally find
non-violent methods to be cheaper; and ostracism from the group will generally be an
adequate sanction
b. Decentralized law making encounters the problem that some individuals will tend to
free ride on the enforcement of others.
c. Self regulation may be an appropriate solution where bargaining at low cost can occur
between risk creators and those affected
2. Self-regulation as delegation of state law-making powers
a. Since SRAs typically command a greater degree of expertise and technical knowledge of
practices and innovatory possibilities, information costs for formulation and interpretation
of standards are lower. Monitoring and enforcement costs are also lower
b. Admin cost of the SRAs are normally internalized in the trade or activity which is subject
to regulation
c. Viable self-regulatory regimes will emerge where monitoring costs for the SRA are low,
the number of local markets is small, and customers are relatively mobile as between
suppliers
d. SRAs may also impose barriers to entry which are good for both industry and public
interest
2. Specific sector studies
3. Competitive self regulation
a. The act of state delegation normally involves conferring on the SRA a monopoly power
to legally constrain supply in the relevant market. However, the threat of state intervention
may, to some extent mitigate the harmful effects of monopolization
b. Alternative solution: if the principal objection to SRAs is that they are able to exploit
their monopolistic control of supply so as to enable practitioners to earn rents, why not
force SRAs to compete with each other sot that rents will be eliminated?
i. Would prevent SRAs from creating barriers to entry but should also constrain
SRAs to formulate standards which meet consumer preferences at lower cost
b. Where the public interest arguments for the state delegating its regulatory powers are
strong, it should not grant monopoly power but rather enable 2 or more SRAs within a given
supplier group to formulate alternative regimes
i. Marginal consumers must be able attribute general quality characteristics to
certificates generated by the self-competing regulatory regimes, otherwise there will
be a race to the bottom
2. Mixed systems
 a. In an effort to realize the many benefits of self regulation but controlling the costs which
result from rent-seeking, some jurisdictions had adopted what has been referred to as co-
regulation - SRAs regulate with some oversight or ratification by the government
i. Main problem is information asymmetry
b. Enforced self-regulation
i. Public agency negotiates with individual firms regulations that are
particularized to each firm, with the threat of an imposition of less tailored standards
if it fails to cooperate. While the firm may thus formulate the rules, they are enforced
by the public agency
1. Advantages: rules are tailored to match firm's circumstances and are
less costly to adapt
a. There are incentives to identify least-cost solutions which
should encourage regulatory innovation

Rings and Promises

 
1. Increase in demand for diamond rings was brought about by the legal development where the
breach of a promise to marry is no longer actionable
2. Evidence suggests that action for breach of promise to marry made people marry who otherwise
would not
3. Abolition of the breach of promise to marry action created a demand for a bonding device, a
need fulfilled by the diamond engagement ring
 
Marriage, Divorce, and Quasi Rents
 
1. When a marriage ends in divorce, the loss that each party suffers is at least the cost of finding a
spouse of equivalent "value" the second time around
2. Problems people are attempting to solve through marriage
a. Marriage vs commercial contract
i. Psychological effect - marriage contract is valuable in itself. Not just the benefits
it brings
ii. Indication that one is worthy of love
b. Fundamental reason to marry is to allow for optimal investment in assets peculiar to the
relationship - children
i. Cost and return from having children span a long time period
b. Marriage has an inherent provision of insurance
2. Special features of the marriage contract
a. Needs concurrence of court for dissolution
b. Personal rights and responsibilities cannot be assigned or delegated
c. Rights and obligations of the parties are defined by law and cannot be waived by mutual
consent
d. Similar to employment contract in that the complexity, subtlety, and exigent quality of
the almost infinite set of duties of each party make it inefficient if not impossible to specify
them with any precision
 e. In reliance on the assurances of the other, each spouse sacrifices current actual and
future potential love interests and invests in this particular marriage
f. The provision of a future stream of services is the standard by which substantial
performance is judged, and the value of the withdrawn services is a first approximation of
damages in the event of breach
2. Overview of law of divorce
a. In the past, divorce was only available on a faulty basis. Divorce is now generally
available on a no fault basis
b. Just as it is often efficient for contracts to be dissolved, so too both parties to a marriage
may gain as a result of a divorce. And just as with other contracts, in order for the
dissolution of a marriage to be pareto optimal, side payments may be required
c. Role of alimony and property division laws is to provide a damage remedy
2. Empirical evidence on decline of value of women
a. Women in general are of higher value as wives at younger ages and depreciate much
more rapidly than do men
b. For every age group, divorced men tend to remarry faster than divorced women
c. Women tend to marry men who are older than themselves
d. As the age of a man increases, the disparity in the ages between him and his spouse also
increases
e. Percentage of men who are married rises steadily as a function of age up to age 65
f. Men tend to marry women slightly below them in measurable items like age, education
and occupation
i. No one for the men at the bottom to marry, and no one for the women at the
top to look up to
b. Most of the time, women receive custody of children in case of divorce
i. 2 costs on women
1. Children are restrictions in finding another mate
2. Children are considered a liability by prospective husbands
b. Men generally develop a career while women develop homemaking skills (of little
market value)
c. Men do not lose their masculine attractiveness with age at the same rate that women
lose their attractiveness
d. Men tend to obtain gains early in the relationship when their own contributions to the
marriage are relatively low and that of their wives relatively great
e. Women tend to obtain more from the contract later on than do men
2. Risk to woman of expropriation of her greater investment in the marriage (quasi rents) by
opportunistic behavior of breaching husband
a. Divorce: after receiving the benefit of the early years of the bargain, a man is able to
terminate the marriage contract without completing the exchange. - he has thus captured
the quasi rents she has lost in the breach of the contract
2. Informal schemes to control difficulties of long-term marriage contract
a. Children as hostages
i. Only works if the father loves his children/ does not work if the children are
already adults
b. Bride price - pay a price for the bride to the bride's family to be held in trust for her
benefit
i. Most young men are wealthier in human capital than in money
ii. Cultural phenomenon that cannot be imposed overnight
 b. Strategic age choice of mate
i. Women can choose husbands whose capital asset value is not likely to exceed
theirs enough to induce their husband to terminate the marriage
ii. Women realize that they have more reason to be concerned with divorce than
widowhood and choose older husbands who are less likely to divorce them
2. Shortcomings of prenuptial agreements and the different regimes of divorce and property
separation that might be adopted by the state
a. Prenuptial agreements
i. Difficulty is in specifying the appropriate level of damage payments
b. Divorce law
i. Unilateral divorce with no property settlement
1. Allows the husband to appropriate quasi rents by abandoning the
marriage after the wife has made disproportionate contributions to the
relationship
ii. Mutual consent divorce with mutually agreed property settlement
1. Breaching party is required to perform unless a release is purchased
a. Difficult because spousal duties cannot be specified nor their
performance monitored
b. Marital duties need to be performed in a certain spirit
c. Court cannot enforce compliance with marital duties
d. In marriage, a breach destroys much of the value of the
remainder of the contract to the wronged party --> a wife who has been
rejected by her husband after 20 years of marriage may be willing to
divorce him for considerably less compensation than she would have
negotiated at the time of marriage as a part of liquidated-damage clause
e. Creates an incentive for opportunistic behavior - breaching
party will act in a more egregious fashion and destroy more of the rents of
his or her spouse to get consent to divorce
ii. Indissoluble marriage
1. Efficient dissolutions of marriage will be sacrificed
2. Incentives are created to exercise greater care in choosing a spouse
3. Neither party has an incentive to destroy rents solely for the purpose of
obtaining the consent of the other to a divorce
4. It is possible to breach without obtaining divorce
ii. Judge-determined divorce and property settlements
1. Information limitations
2. Damages may be so great that breaching party is effectively damage
proof