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Economic Foundations of Regulation with Applications to Financial Markets

Course Number:



Chester Spatt,


Undergraduate Economics


Additional Major in Economics, Additional Major in Economics and Statistics, B.A. in Economics, B.S. in Economics, B.S. in Economics and Mathematical Sciences, B.S. in Economics and Statistics, Minor in Economics

Course Description

The financial crisis has focused attention on the role of regulation for our financial system and the broader economy.  The course will address the foundations of regulation (“why regulate?”) from various perspectives within the context of a market economy, highlighting the sources of “market failure” (such as externalities, adverse selection, and natural monopoly) and potential remedies (such as taxes and fees, disclosure, price regulation, guarantees).  The conflicting goals among regulators (and why we have multiple regulators) and their impact on the meaning of regulation will be considered along with regulatory competition/arbitrage.

Portions of the course will tackle relatively broad questions such as: Why regulate? What is the law of unintended consequences? What is the objective of a policy advocate? Are regulators and regulatory policies a systemic risk? Are our markets rigged? How can regulators enhance the predictability and credibility of their policies? How costly were government guarantees during the financial crisis? Should we bar insider trading?  Should regulations be determined and motivated based upon cost-benefit analysis?  How can we evaluate the success or failure of particular regulations and whether they have achieved their objectives? How does the Dodd-Frank Act promote financial stability? What basic aspects of the financial crisis did Dodd-Frank not address?

The course will consider a broad range of examples of regulation including pollution and emissions regulation, fuel economy standards, utility rate of return regulation and safety regulation in addition to financial regulation, relating all of these to the underlying market failure—such as externalities.   In the context of financial regulation we will consider the regulation and role of various financial intermediaries (credit rating agencies, auditors, banks, etc.), disclosure regulation, insider trading rules, short-sale regulation, proxy-voting advisors, “too big to fail” and security trading.  How do regulations in these arenas relate to traditional market failures and motives for regulation?

Minimum grade standard of "C" applies only to economics courses.


Lecture: 160min/wk