Regulatory Competition and Rules/Principles Based Regulation

This paper analyses how regulatory competition affects principles based and rules based systems of regulation. Competition between regulators creates the possibility of regulatory arbitrage that generates a race to the bottom by regulators that is socially harmful. We derive the welfare effects of such competition and the regulatory responses to these effects, in particular, regulatory harmonisation. These effects can make coordination efforts in developing global regulation socially desirable. We demonstrate, moreover, that corporate lobbying is not always harmful: it can both encourage and discourage socially desirable regulation.